How UK M&A has been impacted throughout lockdown
The impact of the global pandemic on UK M&A has been somewhat mixed. Following an extremely volatile period last year, which saw many businesses struggle to navigate the new norm and many others successfully ride out the storm, we have seen a strong rebound so far in 2021.
Key factors at play, which have contributed to this bounce back include the vaccine rollout, the Spring Budget (which saw many businesses race to complete deals before potential changes to capital gains tax), and the easing of restrictions.
While deal volumes in Q1 2021 rose to levels higher than that of before the lockdown, the main impact on M&A throughout the period of the pandemic has been on deal structures and the M&A process itself. Below are some of the main areas we have seen affected by this, and some key takeaways.
1) Risk of the unknown
There is increased risk in carrying out M&A during any period of uncertainty as one cannot know what is around the corner. From buyers potentially overpaying for a tarnished target, to deals being conducted in a virtual environment where it can be harder to establish if there is a good cultural fit, the current climate has brought about a new and very different landscape for M&A.
Accordingly, creative deal structures are becoming more and more common to allocate risk and mitigate any potential downside.
2) Deal structures
Considering the above, we are finding more than ever that buyers are less willing to pay for assets entirely upfront. Rather, the inclusion of some sort of deferred consideration or earn-out structure is very much becoming the norm.
This approach is far more prudent as it de-risks the buyer, providing flexibility to see how the target’s performance fares following COVID i.e., whether its performance returns to pre-pandemic levels or is sustained either above or below that.
3) Business valuations
Valuing a business during a period of such volatility is extremely difficult for buyers as the historic performance of a business is no longer a reliable measure of its future performance. In assessing what a fair valuation should be for a target, buyers need to determine the true underlying performance of the business in question.
Where a target’s business has been adversely affected by COVID, it begs the question as to whether it can return to its pre-pandemic levels of performance. Equally, where a target’s business has been positively affected by COVID, one must ask how sustainable this ‘COVID boost’ really is.
4) Areas of focus in due diligence
Buyers engaged in M&A during this period will pay more attention to not only the impact the pandemic has had on the target (financially and operationally), but also the steps the target has taken to respond to avoid disruption.
The latter will help buyers establish how well equipped the target is to handle a similar situation in the future, or more relevantly, further waves and lockdowns as we navigate ourselves out of it.
Hence, it is important for sellers to ensure they are prepared for rigorous questioning from buyers on this front. Evidently, the most prepared one is, the more attractive their business will look.
Although aspects of M&A have undoubtedly been affected over lockdown, deal appetite remains strong. With a profusion of dry powder amongst the private equity community, and strategics having realigned their strategy, it is expected there will be plenty more activity in the months to come. If you are therefore looking to sell your business, it is an apt time - just ensure you are adequately prepared, for the process may be different.
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