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 he characterizes the opportunities to clients.
Michael 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, the M&A market could return quite strongly in the first half of 2021. And, again, it will mean the return of 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.
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.
In a June 10, 2020 in Harvard Business Review article, "What M&A Looks Like During the Pandemic," Mark Herndon and John Bender agree: "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. 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 its existing business, the less risk there is. If it's buying a business that's similar to its own existing markets and customer base, it knows that business pretty well.
“It's what we call core to their business—core competitors,” he adds. “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, and different relationships. Those can be built, but it takes time and it's riskier—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," Michael explains.