How management teams can achieve strong M&A outcomes in the current climate
We envisage the current travel restrictions will taper down gradually over the coming months, but in any case, companies will limit business travel to only that deemed essential. We expect that in some cases this may impact the ability to complete transactions, however, we would expect that in most cases parties will have taken practical steps though improvisation or led by example on conducting business without needing physical meetings.
As we have illustrated, a large element of the M&A process is already conducted remotely in front of screens. Although there are points in the process where we would typically expect F2F interaction, there is scope to overcome this but dependent upon two key factors: (i) the ability to find virtual solutions which for practical purposes do most of what is required and (ii) the willingness of the buyer and seller to adapt their deal mindset and approach in the absence of physical meetings. We highlighted in this paper that stakeholders are already embracing technology in M&A and, therefore, additional steps needed should not be cumbersome.
In addition to the role that technology will have to play in filling the gap, we also believe that successful transactions will be those which are marked by a willingness by both the buyer and seller to adapt their approach to evaluating and negotiating deals. We are aware of examples where due to restrictions in physical meetings, sellers are having to set aside funds in escrow for price adjustments in case of issues identified post-closing; buyers unable to get reliance letters on diligence reports; and there is greater emphasis being placed on earnout to mitigate against unknown risks.
For certain types of buyers, the prospect of completing deals without F2F meetings will be palatable. This may be because they have prior knowledge of the target, directly or indirectly, or their investment style creates scope to complete diligence without physical interactions. This could apply to some of the larger PE funds with deal volume cadence or special situation investors that realise the need to create flexibility to take advantage of sub-par prices. These types of buyers will be in a stronger position to drive through deals.
However, there will be another type of buyer which due to their investment style will continue to place emphasis on the need for physical meetings. The need for F2F meetings could be due to their heavy reliance on target management to operate the business post-closing or as a requirement in the partnership agreement with their LPs. For these buyers their inflexibility is likely to create a bottleneck for them to progress.