M&A – how to successfully acquire companies in the current environment
In the current uncertain environment it is challenging to realize successful acquisitions. For buyers, not only the upside but also the downside is often greater than under normal circumstances. Based on our many years of experience, we have therefore formulated recommendations on how to execute acquisitions successfully in the current environment.
The crisis as an opportunity for active buyers
An economically challenging environment – like the current crisis – regularly reveals attractive acquisition opportunities for active buyers. In previous crises, companies have been able to gain sustainable advantages over their competitors by concluding targeted acquisitions. Companies that act from a position of strength during the crisis and invest in a targeted manner lay the foundation for a dynamic start into the “new normal”. Such acquisitions can increase the likelihood of superior long-term performance compared to competitors.
Companies and investors are still capable of concluding buy-side M&A
In order to be able to make targeted use of opportunities in the M&A market during a crisis, sustainable financing of such transactions is required, in particular for larger transactions. Uncertainties regarding the business model or future free cash flows of the target company (business risk) must be mitigated by a moderate transaction financing (financial risk), i.e. applying reduced leverage. Given their high cash reserves and unused debt capacity, especially companies in the Swiss healthcare and consumer services sectors have the required financial flexibility for M&A activities. However, certain potential buyers can be found in virtually all sectors.
Financial flexibility of selected Swiss companies, median values for each sector
In addition, private equity funds worldwide have cash reserves in the billions, which are now being used for acquisitions with potential for high returns. Finally, it should be noted that smaller add-on acquisitions are also possible for companies with limited financial flexibility in order to strengthen their business model and/or increase their resilience.
Recommendations for buyers in the COVID-19 environment
To ensure successful transactions, we recommend the following (please see our «IFBC Dialog» for a more comprehensive overview of our recommendation here):
- Review the M&A strategy in place in relation to the expected “new normal”:
Specification of the anticipated “new normal” in the company’s business and, where applicable, consideration in the corporate strategy. On this basis, review and update the acquisition strategy in order to capture inorganic growth opportunities and eliminate weaknesses of the previous business model.
- Ensuring the financial capacity for acquisitions:
Scenario-based determination of the financial resources that are essentially available for M&A activities, taking into account any financial covenants from existing financing.
- Update target list:
Updating the list of possible target companies on the basis of situation-specific screening criteria.
- Development of a solid foundation:
Establishing a comprehensive understanding of the target company’s business model and market positioning, its current financial condition and the reasons for a sale.
- Modelling of various future developments:
Developing different scenarios is the most effective way to address current uncertainties. This allows an adequate consideration of risks within valuation and the planning of sufficient financial resources in the event of a prolonged economic downturn.
- Realistic assessment of synergies:
In order to account for different price expectations of buyers and sellers – and therefore to successfully realize transactions – synergy considerations are very often important for buyers. The synergy potential must be estimated realistically in four steps: systematic identification of synergies, planning and plausibility checks, valuation as well as a roadmap for implementation.
- Earn-out clauses as an effective instrument:
Depending on the circumstances and the integration intentions of the buyer, earn-out clauses can be an effective instrument for spanning the gap between different price expectations. During the transaction process, it is important to actively address any reservations the seller might have regarding earn-out clauses at an early stage in order to increase transaction security.
- Ensuring sustainable long-term financing:
Particularly in larger transactions, special attention must be paid to sustainable financing solutions in order to prevent refinancing risks.
An overview of our recently completed M&A advisory mandates can be found here.