While the COVID-19 pandemic initially had a general chilling effect on merger and acquisition ("M&A") activity, we have seen an increase in M&A activity recently, particularly as industries rapidly adapt to the new environment and consider opportunities. Both consumer preferences and business models have been forced to change quickly due to the circumstances of the pandemic. This period of transformation provides opportunity for those investors and businesses who are able to efficiently adapt and take advantage of the new trends.
Increased Demand for At-Home Services:
The pandemic has transformed consumer preferences which has created tremendous potential for certain digital businesses. Consumers are in search for goods and services that can be provided to them without leaving the comfort of their own home or at least without in-person interaction. A Deloitte article explained that internet "searches for terms such as "contactless" increased 7x between November and late April". Furthermore, according to Statistics Canada, retail e-commerce sales reached a record high of $3.9 billion in May, which was a 110.8% increase compared to the previous year. Companies that were well-suited or quickly pivoted to deal with the change in consumer preferences have flourished. Examples of these kinds of "at-home service companies" include e-commerce platforms, at-home workout services, video game and digital entertainment services, and food delivery services. As the COVID-19 slowdown impacts many industries, private equity firms and venture capitalists will be looking for companies that are not only immune to the shock but can thrive under the new economic landscape.
Developing the Digital Infrastructure for At-Home Services:
In addition to at-home service companies, there are opportunities in industries that are integral to the digital infrastructure of companies. Businesses have needed to build-up their digital capacity and expertise in a very short period of time due to the COVID-19 shock. This has created an increased need for back-end digital infrastructure products and services that help produce an efficient and enjoyable online consumer experience. A few examples of these kinds of back-end services include: information technology providers/services (i.e. software licensors, data storage and protection services, and hardware maintenance services); digital education services for employees; and transportation and delivery services. These digital infrastructure industries have become an attractive source of M&A opportunity for discerning investors.
Furthermore, as explained by Norton Rose Fulbright Corporate Partner, Troy Ungerman, in an article from Canadian Lawyer, we could see the rise of "bolt-on" acquisitions in the e-commerce sector. These kinds of acquisitions would consist of companies acquiring technology through either asset or share deals in order to quickly "catapult" their online presence. One example of this kind of M&A activity is lululemon's acquisition of Mirror that enabled lululemon to provide an at-home workout experience while promoting their clothing apparel. Another example is Zalando's acquisition of a tech start-up that owned body scanning software in order to help their customers better select clothing sizes when shopping online. Companies will continue to consider M&A options to quickly adapt to the digital transformation.
Opportunity Guided by Expertise:
While the COVID-19 pandemic may have caused a general economic slowdown, it has also led to an increase of value and M&A opportunity in the at-home services and digital infrastructure sectors. The digital transformation may provide M&A opportunities to fast-movers and discerning investors but the complexities of tech-based transactions will require increased legal expertise. It will be important for acquirers to consult with legal specialists in intellectual property and information technology to ensure that their contemplated acquisition goes smoothly and that the value of the target is not undermined due to undetected legal issues.
The author would like to thank Arron Chahal, Articling Student, for his contribution to this legal update.
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