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During economic downturns valuations drop and dealmakers
rightly expect a shift from a sellers' to a buyers' market.
It is uncertain whether this will prove to be true for the COVID-19
recession. Among other factors, it will depend on the extent of
promising acquisition opportunities as well as on the availability
of stimulus money (both from government and other financing
While PE funds show a great appetite for investment
opportunities and are likely to spend vast amounts of money (see
interview page 26), strategic buyers have other objectives and must
act more diligently in preparing their shopping tours. While
authoring roadmap21, we queried in-house M&A strategists on how
they will navigate present acquisition challenges and how they
perceive the European M&A market for the years to come. Here
are our key takeaways:
- Strategic buyers will revaluate their acquisition roadmaps
underlying their overarching growth strategy and update their
target lists essentially around the question of whether to invest
in organic growth (i.e. new business models, technology and
products) or whether the same could be achieved through expansion
deals (but only if those transactions effectively expand their
business scope and get them to the goal faster). Corporates that
follow a systematic and deliberate corporate strategy clearly know
how M&A could enhance their core business and thus have an
advantage over their peers.
- Corporates are expected to pursue markets that proved resilient
during the pandemic rather than explore opportunities that are
cheap for a reason. This is also why M&A strategists forecast
less market consolidation given that transactions that add similar
products or customers or other "more of the same" deals
will most likely not fit their post-pandemic roadmap. Two weak
companies combined do not create a great company. Purchasers of
weak or distressed assets will therefore have less competition from
- As promising opportunities will increasingly be available at
short notice or will be offered in a competitive bidding process,
corporates will be required to act faster than they are used to.
Therefore, it is all the more important to have the full landscape
of potential targets at hand prior to assessing companies that
might not be suitable for the company's strategy. Corporates
should thus be willing to accelerate internal processes and provide
more resources for both deal preparation and its execution.
- Corporates will preferably go after deals requiring selective
integration only. This approach has been frequently followed by US
purchasers who — accepting incompatibilities from the outset
— have not always been eager to integrate the businesses they
have bought. Instead they chose to partner up with their
acquisitions (e.g. Microsoft's acquisition of LinkedIn in
2016). This permits each organisation to focus on what it does best
and yet enables buyers to realise value enhancements at the target.
It remains to be seen if purchasers will really recognise the
autonomous status of the target and are willing to let it operate
independently with existing management being kept in the
driver's seat. If this approach prevails, corporates will
expend less effort on developing complex integration plans,
provided they are clear on how to create value from the acquired
targets without fully integrating new assets.
- Starting from low 2020 deal volumes (decline by 26.7 % compared
to 2019 as per 3Q20 Global M&A Mergermarket Report), executives
anticipate a boost in the number of transactions. Likewise, the
variety of deals is expected to increase. Instead of pursuing
controlling interest deals only, strategic buyers will be more
inclined to acquire minority stakes, enter into partnerships or set
up joint venture structures (with contractual rights to increase
the shareholdings in the future). Earn-outs or deferred payment
mechanisms will help to overlook potential weaknesses when
acquiring expensive assets such as digital assets, AI or similar
- As strategic buyers recognise things in assets that the sellers
cannot see for themselves, the increased deal variety could also
lead to a higher number of asset deals instead of share deals. This
forces sellers to undergo a cleansing process and carve out single
assets or business units for divestment purposes. Acquiring
warehouses, factories or other assets is incidentally also what
political leaders are longing for, namely to bring back production
sites closer to their key markets and reduce supply chains. Most
notably, digital assets will likely be of value in light of higher
cybersecurity needs and machine learning technologies (raising
legal questions of how to properly transfer algorithms).
- Deal making will require more creative elements such as
defining formulas that disregard short-term revenue downfalls and
make decision-makers comfortable with the target company's
economic state based on its cash streams in a normal environment.
In the short to medium term intangibles such as digital assets
might drive valuation more than financials.
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guide to the subject matter. Specialist advice should be sought
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