Next Year to Bring New Ways for New Deals

Despite the ongoing economic uncertainty from the pandemic, many private equity professionals are optimistic about the outlook for 2021 and are looking to alternative merger and acquisition methods to navigate the crisis and pursue new disruptive business growth strategies.

According to Deloitte’s “Future of M&A Trends Survey” of 1,000 U.S. corporate M&A executives and private equity professionals, more than 60% of survey respondents expect transaction activity to return to pre-COVID-19 levels within the next 12 months.

Soon after the World Health Organization declared COVID-19 a pandemic on March 11, deal activity in the U.S. plunged — most notably during April and May. At that time, transaction professionals tentatively paused (92%) or abandoned (78%) at least one transaction due to the pandemic outbreak. However, since March 2020, possibly aiming to take advantage of pandemic-driven business disruptions, 60% say their organizations have been more focused on pursuing new deals.

“M&A executives have moved quickly to adapt and uncover value in new and innovative ways as systemic change driven by the pandemic has resulted in alternative approaches to transactions,” said Russell Thomson, a partner at Deloitte and the firm’s U.S. merger and acquisition services practice leader. “We expect both traditional and alternative M&A to be an important lever for dealmakers as businesses recover and thrive in a post-COVID economy.”

Alternative Dealmaking Rising
For many, alternative deals are quickly outpacing traditional M&A activity as the search for value intensifies in a low-growth environment. When asked which type of deals their organizations are most interested in pursuing, corporate responders’ top choice were alternatives to traditional M&A, including alliances, joint ventures, and special purpose acquisition companies (45%) which was higher than traditional acquisitions (35%). On the other hand, private equity investors plan to remain more focused on traditional acquisitions (53%), while simultaneously pursuing alternatives like private investment in public equity deals, minority stakes, club deals and alliances (32%).

“As businesses prepare for a post-COVID world, including fundamentally reshaped economies and societies, the dealmaking environment will also materially change,” said Mark Purowitz, a principal with Deloitte. “Companies were starting to expand their definition of M&A to include partnerships, alliances, joint ventures and other alternative investments that create intrinsic and long-lasting value, but COVID-19 has accelerated dealmakers’ needs to create more optionality for their organizations’ internal and external ecosystems.”

Virtual Dealmaking Rising
The majority of professionals surveyed (87%) report that their organizations were able to effectively manage a deal in a purely virtual environment, so much so that more than half (55%) anticipate that virtual dealmaking will be the preferred platform even after the pandemic is over.

However, virtual dealmaking does not remain without its own challenges. Just over half of responders noted that cybersecurity threats are their organizations’ biggest concern around executing transactions virtually.

“When it comes to cyber in an M&A world – it’s important to develop cyber threat profiles of prospective targets and portfolio companies to determine the risks each present,” said Deborah Golden, a principal at Deloitte. “Chief information security officers (CISOs) understand how a data breach can negatively impact the valuation and the underlying deal structure itself. Leaving cyber out of that risk picture may lead to not only brand and reputational risk, but also significant and unaccounted remediation costs.”

Other virtual dealmaking concerns highlighted by Deloitte’s report include the ability to forge relationships with management teams (40%), extended regulatory approvals (39%), and post-closing technology integration (16%).

“It may be too early to assess the long-term implications of virtual dealmaking as many of the deals currently in progress now are resulting from management relationships that were formed pre-COVID,” added Mr. Thomson. “We also expect integration in a virtual setting will become much more complex a few months from now. Culture and compatibility issues should be given greater attention on the diligence side, as they pose major downstream integration implications.”

Deloitte’s Future of M&A Trends Survey polled 1,000 U.S. dealmakers, 75% working in corporate development and 25% working in private equity, from August 20 to September 1, 2020.

New York-headquartered Deloitte provides audit, consulting, tax and advisory services to nearly 90% of the Fortune 500 and more than 7,000 private and middle-market companies.

To access the Future of M&A Trends Survey click HERE.

Private Equity Professional | October 7, 2020

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