Johannesburg, 20 Aug 2019
In turbulent times, when we bear witness to trade wars and protectionism the world over, we’ve also seen a spike in mergers and acquisitions (M&A) as companies look to either bulk up or slim down to survive oncoming storms.
Some consider this surprising; my view is that it makes sense.
Strategic options emerge.
In challenging economic times, M&As create strategic options. The post-recession landscape is usually very different from its predecessor, and no one really knows ahead of time how supply chains may change, what the financial system will look like, or to what extent consumers may have altered their spending patterns. As companies ride out the storm, they need to position themselves to emerge from the downturn both strong and flexible.
The right acquisitions can help.
Your investment thesis
One key to avoiding disastrous, ill-considered or even emotional acquisitions is to have a clear yet flexible investment thesis; one that that clearly articulates why buying a particular business will make your company more valuable.
This is important within a stable economic environment, but it becomes all the more important in a volatile environment.
When the environment surrounding a businesses and its operations is fluid and difficult to predict, and the ability to ‘ride out’ or fund businesses even in the short term is an unknown factor, it is critical to focus on key underlying fundamentals, like cash generation.
However, while it is true that you should follow a clearly defined investment mandate with an increased focus on underlying fundamentals, you should also constantly update your target list to reflect the changing environment, as it changes.
Once-successful business models may no longer work. One-time market leaders may be compromised. And you may want to add businesses that you think are likely to thrive in a different environment. While your investment thesis remains clear, concise and stable, your operations should still evolve and remain agile.
It can get complicated.
Some of the drivers below can play a role in M&A activity:
- Blocked mergers if jobs are at stake during periods of high unemployment
- ‘Blood in the water’ when it comes to international ratings agencies
- International acquirers placing themselves in ‘survival mode’
- Being unable to agree on price when there’s market turbulence
- Substantive changes in business value during a deal-making period
- The delayed roll-out of national legislation that is pro-business
For instance, an acquiring company may try to forecast the future performance of the entity they’re merging with. But in economically volatile times, these forecasts become unreliable, and an acquiring firm may be less eager to pursue a transaction that has unclear outcomes.
Time frames are a factor
What are the different M&A considerations for privately held firms as opposed to listed companies? For me, the major difference is time frames.
A public company is under more pressure to realise gains sooner, while a private firm can take a longer and more strategic view in realising benefits.
In terms of the "best time" to carry out a transaction, there’s no time that is necessarily "better" than another. Often, when a publicly traded company has a high current share price, it will try to complete deals in which payment is made based on the highly valued share.
When opportunity meets need
But by and large, transactions happen when the need meets the opportunity; when the board of directors and executive management identify opportunities to achieve or sustain competitive advantage that can be realised via M&As.
When market conditions are favourable, and the necessary financing and a suitable target are both available, the opportunity meets the need.
And, if there is a change in market fundamentals, driven by technology, globalisation, regulation or other competitive forces, M&A activity may become a necessity. For example, if the industry is converging, the board may decide to become an early mover in order to avoid being left behind.
And, in a nutshell…
For companies that are strong strategically and financially, volatile times present opportunities to improve competitive position via acquisitions and partnerships. And, clearly, both local and international volatility have an impact on M&A decision-making. But a clear investment thesis is all.
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