When the pandemic broke, hand brakes were swiftly pulled, and just like that, the record-breaking bull run of M&A activity was over. It's a very different landscape now credit has become tighter and investors have become more measured. Conventional notions of deal certainty and risk are being severely challenged by an unfamiliar and uncertain environment, and even industry veterans are starting to wonder how long the fear of the unknown will linger.
In many respects we have seen exactly what you would expect in times of economic crisis: a busy value preservation and capital raising period where businesses take a defensive strategy to strengthen their balance sheets, and future-proof themselves against what may lie ahead. Some have been fortunate enough to adopt an attacking strategy of putting themselves into pole position for making opportunistic purchases.
There is a way back to M&A business-as-usual, but there are also clear impediments lying along that track. In particular:
- Deals inevitably require actual human contact - there is only so much comfort you can obtain via Zoom. Having said that, if you already have a presence in New Zealand or you are presented with an opportunity to be a white knight for people you know well and trust, this may be an ideal opportunity for you to gain a significant advantage over your competitors.
- There are also large questions to be answered about the effectiveness of conventional valuation methodologies in this new environment. How do you fairly and accurately calculate the impact of the pandemic on the target business, if at all – and who bears the risk of COVID-20 or COVID-21?
- There is a growing complexity to New Zealand’s overseas investment regime and the willingness of the Government to intervene may present fresh challenges.
What do we predict, then, for the coming months? Those who take the right risks and execute M&A deals will come out of the crisis in better shape than others. This could, for those players, present the opportunity to pre-shape the post-crisis market.
They have assessed the landscape in terms of investment opportunities, market volume, likely board strategies, ‘fear of missing out’ (or FOMO ), and legal considerations regarding earnout mechanisms and ‘Material Adverse Change’ clauses. Their analysis is here.