Covid disruption creates fertile M&A conditions

From the start of the coronavirus pandemic I’ve been convinced that, despite its disastrous economic consequences, this crisis will also afford opportunities to intelligent entrepreneurs.

Nowhere is this more true than in the field of mergers and acquisitions.

With companies impacted by the pandemic in widely varying degrees, some severely distressed and others coping effectively, this disruption of the market ecosystem provides fertile ground for M&A activity.

M&A is the creative process that corrects imbalances and reenergises faltering enterprises, to the benefit of the whole project of wealth creation.

In the course of my career I’ve been involved in more than 60 acquisitions, so I know the opportunities and the pitfalls. No two deals are the same, but there are some basic principles that can be applied across the board.

The first rule is never to pay more for an acquisition than it is worth – if it’s overpriced, walk away from the deal – and make sure you’ve done your homework, so you have detailed knowledge of the target company.

Your business should also have an organic growth strategy, without relying solely on acquisitions for expansion.

Any merger must be executed in a disciplined way that will win the confidence of vendors, followed by rapid integration of the acquired company – creating a new entity that provides fresh strategies and quickly generates its own culture.

People are key to the

effectiveness of this exercise. Stakeholders at every level of the acquisition must be made welcome and helped to feel valued.

Intelligence is essential to the efficient conduct of M&A activity, but emotional intelligence is the most important factor.

Mergers and acquisitions are likely to increase in the coming year. The major disruption created by a crisis such as Covid-19 requires a large-scale reconfiguration of the business map.

This is particularly the case in the oil and gas industry, which even before the coronavirus emerged was facing the need to reinvent itself to meet the demand for green energy.

The twin drivers of change – net-zero carbon targets and the pandemic – are likely to make 2021 a year of intensive M&A activity in the energy industry, with significant implications for the northeast.

Mike Beveridge, UK co-head of Simmons Energy corporate finance specialists, said recently that 2021 is shaping up to be an exciting period for mergers and acquisitions in the oil and gas industry.

He cited the emergence of Middle East buyers and investors, the significant private-equity portfolio built up during the last “super cycle” and the banks, “who essentially now have control of several heavily leveraged oilfield services

businesses”, as drivers of M&A activity.

Energy transition is a big game-changer, with offshore wind in particular a fertile field for dealmaking. New areas such as electrification of oil and gas production, carbon capture, hydrogen and energy storage will “rapidly gain M&A momentum”, Mr Beveridge forecast.

Despite the global decline in M&A last year to $2.9 trillion, 2020 still ranked fifth for value of deals since the 2008 downturn.

But in Scotland, by November last year, only 165 deals had been recorded, to a value of £2.3 billion, compared with 465 deals worth £7.6bn over the same period the previous year. Worst hit

was the small cap segment, with volumes down by 83% – mid-market deals fell 41% in volume.

Yet everything points to renewed activity in 2021. Apart from the rationalisation arising from distressed companies with insufficient working capital seeking an M&A solution, the low pound is attracting foreign buyers and, in the first quarter, concern over tax could increase the volume of M&A activity in advance of the spring Budget.

It’s not just large firms that are involved in mergers and acquisitions. Family businesses, which generate almost half of Scotland’s GDP, despite a culture of caution, have a keen interest in acquisitions.

In the depressed Q2 of 2020, they completed Aberdeen-based Garrick Group’s acquisition of MRDS and an employee buyout of MHB Consultants in Glasgow.

Anderson Anderson & Brown, leading M&A specialists, reported last September that “our many family business clients are up for the challenge and several are on the hunt for new acquisitions”.

They are right – M&A activity is the evolutionary process that renews and invigorates business.

New shoots sprouting: Rapid integration of the purchased company can create a whole new business.