“The status quo is not a strategy that is going to be successful”: Growth through acquisition in the next normal

June 16, 2020

Business headlines emphasize uncertainty, loss, and contraction during what some anticipate may be a protracted global pandemic—an ongoing health and economic crisis.

During the initial turmoil created by COVID-19, companies focused on cash, liquidity—on survival. Signs of potential recovery have begun to shift sentiment toward acquisition opportunities to thrive in the next normal, which include securing supply chain or vertical integration, scaling in order to keep costs low, and enabling or employing new technologies.

There is optimism for businesses that have survived the first wave of the global crisis, particularly businesses that are well capitalized or supported by cheap debt post-COVID.

There are opportunities for inorganic growth and expansion.

"We've enjoyed really strong M&A markets for almost a decade," says Michael Morrow, BDO's national corporate-finance leader. "Adjustments to the market only come around once in a while, and if you're thinking about supercharging the growth of your business, or repositioning the business, it's definitely a buyers' market. There haven't historically been a lot of opportunities like this. It's a once-in-a-decade opportunity. A lot of organizations that might have wanted to do acquisitions were effectively blocked out of the market by the competition. In this environment, there's much less competition, valuations are more realistic, and companies that take a longer-term approach and look to make strategic acquisitions will be successful. That's how I characterize the opportunities to clients," Michael says.

He adds: "I do think we're in a recovery phrase. The economy and underlying business dynamics are turning positive and quite positive, so there is a window to do acquisitions in an environment that's more conducive to do so rather than when there is a high level of competition. But that window is pretty short. It's a number of months, not a year. I see things coming back quite quickly. The tone of the market has turned much more positive over the last number of months. If that continues, we could see the M&A market return quite strongly in the back half of this year and into next year. And, again, we'll return back to more frothy, expensive, and competitive acquisition markets."

After months focused on response and resilience, it's possible to rethink and grow—to define the next normal.

And, the time to act is now.

Strategizing for the next normal

"The status quo is not a strategy that is going to be successful, " Michael advises.

Mark Herndon and John Bender agree in a June 10, 2020, article in Harvard Business Review, "What M&A Looks Like During the Pandemic ": "To operationally execute M&A remotely during crisis and through a still highly uncertain economic recovery, across all deal phases and across multiple different deal-type scenarios will require a level of internal M&A capability beyond what is currently in place at many companies."

"BDO helps business owners and management teams think about their strategy," Michael says. "What capabilities do they need in order to execute on what they want the company to be, and is it something they can do internally or is it something we have to look externally to do through potential acquisition? There are different types of acquisitions to consider. The closer a company is to their existing business, the less risk there is. So if they're buying a business that looks just like their own existing markets and customer base, they know that business pretty well. It's what we call core to their business—core competitors. Eliminating a competitor or getting scale might be driving that decision. You could probably also make an argument to say, 'We could do that on our own. Maybe it just takes time.' As business owners and management teams expand from core to adjacent acquisitions or transformational acquisitions, it's more difficult, because it requires different skills, different mindsets, different relationships, and they can build those, but it takes time and it takes risk—or they can go out and buy it and know that they have all the key components to be successful. So that's how you think about 'does it make sense to do an acquisition in terms of where we need to go—do we need to add adjacent capabilities or transformational opportunities, skill sets, and capabilities—and, if so, does an acquisition make sense to do that?' The kind of framework and thinking that the business owner or management team needs, we offer at BDO."

BDO'S growth-strategy framework—by definition

Core: Acquisitions that expand the market share of an existing business—they focus on the same (or a similar) service or product offering and customer base

Adjacent: Acquisitions that provide entry into an adjacent market, providing complementary products and services—these could focus the same customer, but on new product and service offerings

Transformational: Acquisitions that access new products, services, customers, and markets

Digital transformation: an illustration of next-normal M&A

BDO helps clients rethink what is possible—and what will help them to excel, during global contraction, recovery, and the next normal.

"We have a client, for example, that does classroom-environment learning and coaching," Michael explains. "As a result of the global pandemic, that format is no longer effective, and they're accelerating their transition toward digital delivery. Do they have the internal capabilities to transform digitally? They also need to move into other markets digitally. So they're deciding whether to focus on core or transformational M&A. To adapt to the next normal will require new talent, a changed mindset, a different skill set—do they build that, or do they go out and buy it?"

How BDO can help supercharge your business growth post-pandemic

"We can jump in at any point," Michael says. "Sometimes it's as early as when business owners or management teams say 'we want to grow by acquisition, please help us with our strategy'—right at the beginning. Or, they may say, 'We already know our strategy—this is what we want to acquire. Can you help us understand what's available out there in terms of a market scan, and then help us to approach potential targets'—so we could get inserted there. Or, we could get inserted when they say, 'We've already identified this company. We want to acquire them. Help us to structure the deal, do the diligence, finance it, and integrate it.' "

BDO supports business owners and management teams keen on growth—start to finish—from strategic consulting through integration, including valuations, financing, and all necessary due diligence—IT, HR, legal, and tax.

"Far from being out of action through 2020, corporate acquirers that strategically determine to make hay during this painful and unprecedented economic earthquake will be the ones most able to prevail as economic activity rebounds," conclude Mark Herndon and John Bender in the M&A Leadership Council survey of 50 C-level executives and senior corporate leaders published in Harvard Business Review.

To learn more about how BDO can help your business grow during the recovery—and rethink the next normal—contact Michael Morrow or BDO Transaction Advisory Services.

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