For companies with cash on hand, there will undoubtedly be opportunities in the market for M&A. But with more companies than ever adopting poison pills, what is the outlook for M&A activity for the rest of 2020 and into 2021? Tim Human investigates
As the global extent of the Covid-19 outbreak became apparent, M&A deals began to hit the buffers. Xerox pulled its $35 bn hostile bid for HP. US aerospace suppliers Hexcel and Woodward cancelled their $6.4 bn merger. And 1-800-Flowers.com said it couldn’t complete a deal to buy one of Bed Bath & Beyond’s business units. The seller responded by suing.
Overall, global M&A deal value fell 41 percent in the first half of 2020, compared with the same period last year, according to data from Refinitiv. Understandably, many buyers put their plans on the shelf and turned their focus inward to weather the economic storm caused by the pandemic. In 2019, deal-makers wondered whether the six-year M&A cycle was coming to an end; Covid-19 provided the answer.
Transactions continue, however, albeit at reduced levels. While big, transformative deals appear to be off the table, those with cash are in a strong position to take advantage of opportunities. Consolidation is also expected in those industries worst hit by the coronavirus.
‘With respect to M&A activity generally, we witnessed a decline in the volume of both domestic and international deals,’ says Vilena Nicolet, an associate at law firm Faegre Drinker Biddle & Reath. ‘We expected some slowing of the market this year leading into the [US] election, and the pandemic contributed to that volatility. Even with that uncertainty, however, some sectors, such as technology and healthcare, have remained strong. And we now see positive developments in the overall M&A pipeline.’
Global slowdown M&A activity in 2020 so far shows a marked slowdown, although there are notable differences across regions. The value of deals focused on US targets stood at $354.9 bn in the first six months of the year, a drop of 69 percent compared with the first half of 2019, says Refinitiv. Over the same period, the global share of US deal-making fell to 30 percent from 55 percent, making it the lowest level since records began in 1980.
Europe, by contrast, saw deal value rise 37 percent, boosted by capturing five of the top 10 largest deals between January and June. Those mega-deals included the $107 bn share unification of Unilever, which plans to combine its British and Dutch entities in a single London listing. Asia-Pacific deal value slipped 8 percent in the year to June, taking it to a seven-year low.
Looking at sectors, financials, industrials and technology led the way in the first six months of the year. While all three groups saw a drop in activity, they collectively accounted for 47 percent of deal value and 43 percent of deal volume globally, reports Refinitiv. Private equity deal value also fell sharply, dropping 24 percent compared with 2019. As a proportion of total M&A, however, buyouts rose to 17 percent – the highest level since 2007.
Source: Refinitiv
Cash is king Chris Tyson, head of special purpose acquisition company advisory services and M&A at New York-headquartered MZ Group, says the current environment offers good value for those with access to capital.
‘Given a really supportive credit and loan environment where cash is king, acquisitions can be a good opportunity to pick up some bargains and some distressed pricing levels,' he points out. 'Distressed hospitality assets have enjoyed a high volume of M&A this year, for example.
‘Some businesses may prefer to join forces to better position themselves for the upcoming prolonged and slow recovery. With the right deal structure, we should see higher M&A volume in the next 12-18 months versus the past six to nine months.’
Walied Soliman, Canadian chair of Norton Rose Fulbright, the global law firm, is also feeling optimistic. ‘One of the great things about the capital markets in the western world is that they are resilient,' he says. 'And in times like this, the most resilient really do get the best opportunities.
‘We are seeing a lot of opportunities out there where investors and strategic buyers are flocking to ensure they don’t miss out. Our M&A group – after a brief period where it was not busy in April – has absolutely taken off and is exceptionally busy right now across our jurisdiction in Canada.’
Soliman adds that shareholder activism is still affecting the M&A market, just at a less visible level. ‘I think activism has not quietened down over the past several months – it’s just gone underground,’ he says. ‘We are seeing a lot of settlements in the activist arena. It’s been quite busy, but we’re seeing far fewer fights.’
How quickly could broader activity pick up? An analysis by Goldman Sachs finds that there have been three major downturns in M&A over recent decades, taking place in 1990-1991, 2001-2002 and 2008-2009. On each occasion, deal volumes fell 50 percent over two years and then took between three and six years to return to previous highs, notes the bank.
As the current downturn is event-driven rather than cyclical or secular in nature, we could see a quicker rebound, it adds. The M&A outlook is also boosted by the strong financial position of many companies and financial firms.
For Goldman Sachs, there are three stages in an M&A recovery. First, there are ‘involuntary’ deals involving companies in bankruptcy or those with a desperate need to raise cash. Second, there are ‘near-in’ deals where companies join up with similar peers and avoid riskier transactions. And third, there is the return to growth deals where companies look to expand into new industries or regions. At the time of its analysis in mid-June, Goldman Sachs estimated the world was in the second phase.
Socially distanced deals One question thrown up by the Covid-19 pandemic is how capital markets would fare in a world of lockdowns and social-distancing measures. While relationship building is undeniably harder over Zoom than in person, those involved in the M&A business say processes have adjusted quickly to the new environment.
‘It is quite staggering – and at the same time remarkable – to note that everyone seemed ready to be fully remote before the disaster even struck,’ says Tyson. ‘It took deal participants, including bankers, maybe a week to get their ducks in a row and figure out the best format for collaboration.
‘All due diligence has long been handled within virtual data rooms and some natural language-processing tools are being used to find needed excerpts in the documents. And there are plenty of collaborative software solutions that allow you to assign tasks, monitor projects and let a number of people work on the same document in real time.’
Another potential drag on M&A activity, at least in the short term, could be the surge in US companies adopting shareholder rights plans, also known as poison pills. These plans allow companies to issue new shares in the face of a hostile bidder, diluting their stake in the company and sabotaging the takeover attempt. At least 57 companies adopted a poison pill between March 1 and June 15, according to law firm Sidley Austin.
Poison pills had fallen out of favor in recent years in the face of opposition from institutional investors and proxy advisers. Just 25 companies in the S&P 1500 had one in place in 2019, says Sidley. In April this year, ISS said poison pills are acceptable as long as they are only in place for less than a year and have a justifiable reason to exist. ‘A severe stock price decline as a result of the Covid-19 pandemic is likely to be considered valid justification in most cases,’ ISS said.
But advisers doubt the rights plans will have much impact on deal-making. First, the number of plans adopted remains low. And second, they may not be used, even in an M&A situation.
‘I don’t think the recent rise in poison pills is likely to affect M&A activity in a material way,’ says Nicolet. ‘That’s especially true if a target has a poison pill ‘on the shelf’, so to speak. If a bidder is working with a company and its board, those poison pills may never be implemented.’
The IR function has always been critical to M&A activity. In recent years, however, IR professionals have taken a bigger role in corporate development and other strategic responsibilities. Those links are growing even stronger in the Covid-19 environment as companies prepare for a future wave of deals.
‘There are companies that are acquisitive, but there are also companies that are worried about being acquired, which is why they need to bolster their IR program from a corporate development perspective,’ says Oskar Yasar, managing partner at Broome Yasar Partnership, an IR executive search consultancy. He says a number of recent clients he worked with said they would not consider an individual for the IR role unless he or she had M&A experience. In one case, a company was worried about an activist who had joined the share register and could push for a sale of the business.
The longer-term trend speaks to the growing stature and experience of individuals working within the IR profession, adds Yasar. ‘Candidates are asking to broaden out to do other roles, but they need to come from either a corporate finance or financial markets background to understand the machinations,’ he says. ‘A lot of bankers are finding the role of IR attractive. They’re doing work similar to work they did on the banking side and they’re taking their experience to add value to organizations.'
A related change is the growing number of IR leaders managing both IR and corporate development. It’s becoming more common to see job titles of IR plus another area, such as strategy, financial planning or M&A.
‘It all starts with having great teams and empowering them to run things day to day within each function,’ says Jud Henry, senior vice president of IR at T-Mobile US, who previously managed IR and corporate development at Sprint, which completed its merger with T-Mobile US earlier this year.
‘I was fortunate to have a very talented and hardworking team in IR and corporate development. Both roles can be cyclical at times, with IR particularly busy around earnings and corporate access activities, and corporate development around strategic events and opportunities. Being mindful of both and looking ahead as much as possible helps balance the two and plan for the peaks. In addition to leading IR and corporate strategy, I was the company treasurer during the merger process: a very interesting and exciting front-row seat from many angles.’
Henry says there are advantages and challenges to managing both IR and M&A. ‘The benefits are that you are at the center of both the company strategy and the Wall Street perspective of the business,’ he says. ‘The flip side is that there is a natural wall of information as far as what has been, or can be, shared externally with regard to strategic initiatives.’
The role of IR during M&A transactions is a key function, in terms of both clear communications and obtaining after-market support, says Chris Tyson, head of special purpose acquisition company advisory services and M&A at MZ Group. Here he offers advice on how to engage with the market during deal activity.
Ongoing communication with shareholders and analysts: By keeping in constant touch with top shareholders and analysts on topics that matter, you can better understand how they feel about M&A as a growth driver for the company. This perception should remain unbiased and be shared with the broader team to streamline the communications plan. Ultimately, it will help you answer the question: does the acquisition at hand drive value for shareholders? The IRO must understand all intricacies of the deal, including the rationale behind the decision and the price paid.
Determining the proper form of communication: Communication strategies can differ materially depending on the M&A opportunity – for example, in complexity and transaction size. Based on these factors, IR teams must determine whether to issue a simple press release or consider more impactful measures, such as a special shareholder call with Q&A. In bigger transactions we usually recommend hosting a call or inviting the CEO of a new firm to be present on the next earnings call and available for Q&A to start building trust with investors.
● Strategic reason for the acquisition – This is the single-most important point of the communication strategy. IROs should use this opportunity to explain why the combination makes sense and what it adds to the company.
● Information on firm being acquired – Give investors key details about the company, its history, financial profile and successful initiatives. This can also serve as an opportunity to remind investors about the industry they play in, which helps paint a picture of why the acquisition is so appealing.
● Terms of the deal – The high-level financials of the deal should be provided, including how much was paid in total, the structure of the deal (cash, stock or a mix), any earn-outs and how the acquirer funded it.
● What's the new company like? – This is an opportunity to explain how the story has changed, new key catalysts for shareholders to track, who will remain on the team (or be added) as key leadership, and what the new financial profile is on a pro forma basis, today and in the future.
Ongoing communication with shareholders and analysts (again): Staying in touch with your shareholder base is critically important after a major transaction to ensure they are comfortable, understand all key elements that were conveyed, and answer any additional questions they may have.
On April 1, 2020, T-Mobile US and Sprint finally closed their $23 bn merger, almost two years after it was first announced. To join forces, the two companies had to gain approval from the US Federal Communications Commission and Department of Justice, as well as see off a legal challenge from more than a dozen US state attorneys general, who opposed the deal on competition grounds.
For the IR teams involved, it was a long lesson in managing uncertainty. Jud Henry ran IR, corporate development and treasury at Sprint during the merger process, and is now senior vice president of IR at the combined company. He says his main takeaway from the deal is the need to be adaptive and not take anything for granted.
‘The merger review period lasted 23 months from announcement to closing, with many turns throughout the regulatory process,’ Henry recalls. ‘Adapting to events along the way, as well as the fact that the focus from investors flips from business fundamentals to the merger’s probabilities and timing, can bring fatigue and is very different from the traditional investor relations routine.’
There were several instances when the media would break a supposed leak, notes Henry: ‘Often there is little, if anything, that we can comment in response given the sensitive and confidential nature of the process, which
somewhat ties our hands in IR. But it is imperative to remain disciplined to protect the best interests of the company.’
Nils Paellmann, vice president and head of IR at T-Mobile US during the merger, says investors were not skeptical about the merits of the deal, but rather whether it would be approved. ‘A lot of the so-called experts believed it wouldn’t get regulatory approval,’ he says. ‘The lawyers would always say, Don’t talk about Plan B, because then maybe the regulator will think the company is not really focused on Plan A. But of course, investors wanted to hear what happens to T-Mobile if there’s no merger.’
As one might expect, the share register of T-Mobile became more hedge fund-heavy during the transaction. ‘Cultivating good relationships with them can be very helpful,’ notes Paellmann. ‘They tend to have their own lawyers in Washington, DC and are very attuned to the process. Sometimes I heard about regulatory developments from the merger arb guys before I heard them in-house.’
Paellmann also has a tip for anyone tackling a deal of similar complexity and size: make a factbook. ‘Our proxy for the merger was something like 600 pages,’ he says. ‘So we did a merger factbook, which compiled the key themes and was much more digestible for investors. That was very helpful. We were able to use that factbook for two years, always referring back to it.’
