After months of uncertainty due to COVID-19, businesses are looking to mergers and acquisitions (M&A) as a key strategy for moving past the pandemic-related turbulence and securing success for the future.
“At the end of 2020, clients had a much better handle on the impact of the pandemic, where their businesses stood and the opportunities ahead,” says Zachary Chubb, managing director of the food and beverage group at City National Bank. “Many of them shifted their focus from preparing for and managing the impact of COVID onto positioning themselves to capitalize on the new normal.”
Positioning yourself for “the new normal” could mean acquiring or collaborating with other firms in order to attain competencies that the post-pandemic market demands. For example, in the food and beverage industry, the new normal includes new levels of digital adaptation, direct-to-consumer products and a focus on health and wellness, Chubb says.
Chubb and other experts expect to see strong post-pandemic M&A activity as a result. In response to the lifting of pandemic restrictions and financing availability, the first half of 2021 marked “one of the longest M&A cycles we've experienced in recent years,” says Vito Sperduto, managing director and co-head of Global Mergers and Acquisitions at RBC Capital Markets. Business leaders interested in acquiring, merging or being acquired will be more successful if they understand current markets and how to position their companies for successful M&A transactions.
What's driving the trend in mergers & acquisitions?
There are a number of financial reasons why companies are considering M&A scenarios.
First of all, companies now have more cash on hand, Sperduto says.
“After the 2008-2009 financial crisis, companies started hoarding cash,” he explains. “Cash on balance sheets has been at record levels each year since that financial crisis. In fact, in the first half of 2021, cash on balance sheets of the S&P 500 had more than doubled since the 2008 crisis.”
But should you jump on board?
Not every opportunity is right for every company. Forming an alliance or partnership with another company may be a better choice for some companies' growth goals. For others, simply staying the course and growing organically is ideal.
“A merger or acquisition is generally an accretive growth strategy for companies looking to drive innovation quickly and increase scale,” Chubb explains. “Creating a partnership, on the other hand, allows the two businesses to collaborate before making a committed step forward.”
To determine which growth strategy is best for your company, figure out what your customers want and need, Chubb advises. From there, decide whether you could meet that demand more effectively with a partner, through an acquisition or through augmenting existing capabilities internally.
Determining whether to pursue growth through an acquisition or merger depends on your goals, risk tolerance, and the financial implications, Chubb says.
Through a partnership, companies may not get the full financial or operating benefit of acquisition right away, “but you do get the chance to leverage and benefit from each other's capabilities,” he says.
Tips for purchasers
Acquiring a business in today's climate may look different from a few years ago. The virtual environment forced by the pandemic, for instance, caused an incredible amount of acceleration across multiple different business trends in 2020.
“We've seen that those businesses that are well-positioned and resilient are able to quickly adapt, regardless of whether employees are working at home or on-site,” Sperduto says.
If you're looking to make an acquisition, there are a few tips to keep in mind, including:
- Prepare in advance. An important initial step in acquiring another business is proactively preparing—strategically and financially—to make a move versus trying to chase a situation when an opportunity arises.
- Take time to understand the target. In addition to being prepared for acquisition, business leaders who truly understand the target business, including how it will fit into their current business and how to realize operational and financial synergies will be more successful, Chubb says.
- Consider governance policies. Sperduto recommends focusing not only on the financial performance of the business you're buying but also on the employees, shareholders and the social and governance issues involved with that business.
- Consider the market conditions, but don't be swayed by them. The conditions may be ripe for M&A activity, but that doesn't mean M&A activity is right for every business. Sperduto explains, “Good, strategic M&A transactions get done regardless of the market. It has to make sense for what you're trying to do.”
Good deals that have a strong, strategic rationale are the ones that are successful, says Sperduto. Whether an acquisition is right tends to depend on the industry and how the company is positioned within the industry.
Tips for sellers
As the population ages and looks to retire, many business owners are starting to consider different strategies for selling their business.
“If your business is a leader in an industry vertical, it's probably been afforded a huge increase in valuation,” Sperduto says. “Many business owners are looking at M&A to solidify that position, while others are looking at M&A as a way to bolster their position. On the other hand, some may decide that M&A is their exit and a better option than continuing to run their business.”
If you're looking to sell your business in the near future, there are a few tips to keep in mind, including:
- Start planning early. “We recommend looking for a buyer a few years in advance,” says Nuri Benturk, wealth manager at RBC Wealth Management-U.S., who works with many business owner clients on M&A transactions. “Don't start the dialogue when you're ready to retire.” Often, there are extenuating circumstances pushing owners to sell, such as a divorce or health issues. By demanding a quick sale, many business owners miss the chance to truly get what their business is worth.
- Talk to investment bankers. One mistake business owners make is trying to sell the business without expert help. “Most owners are biased when it comes to valuation. They've spent their entire lives building a business and there's a disconnect between what they think the business is worth and what a buyer will pay,” Benturk says.
- Pursue competing bids. The best way to find out the true value of your business is to get multiple competitive bids. Frequently, a business owner will hear from a competitor who wants to buy their business, or from a private equity (PE) firm who knocked on their door and wants to buy, and they consider just the one price, Benturk says. “But with one price, you never get the real value.”
- Consider alternatives. With so many business owners nearing retirement, many traditional companies simply don't find a lot of interested buyers, Benturk says. In that case, he recommends owners consider creating an ESOP (Employee Stock Ownership Plan). With an ESOP, you sell the company back to the qualified plan and employees are the beneficiaries of the qualified plan.
“We're seeing more and more ESOPs,” Benturk says. “Business owners may not want a PE company coming in and firing employees they've had for 30 or 40 years. An ESOP creates continuity for employees and creates tax benefits for the owner.”
Whether you're looking to acquire a business or are looking for an exit, putting in time and effort to research, plan and prepare can ensure that your company is positioned for success in the future.