Board M&A Tips for the New Normal
Mark Herndon Interviews with Boardroom Insider
For the global economy, 2020 was no doubt a series of shocks, but the crashing lows seem to have been followed by some giddy highs (in late November the U.S. Dow Jones Industrial Average finished above 30,000 for the first time in history). Merger and acquisition activity has been bouncy too. In the spring, global M&A plunged to historic lows, but jumped back smartly by the late months of the year. Even big “mega-deals” of $10 billion+ have returned to levels of late 2019.
What does this mean for your board going into 2021? Maybe that the months of putting out fires have now evolved into a time you’ll need to weigh company dealmaking again – but that many of the M&A rules you followed a year ago will look very different now.
- After a year of economic wreckage, you’d assume there are plenty of weakened gazelles out there being eagerly pursued by hungry lions. But, “while we expected more organizations to be doing distressed deals, we found that’s not the case,” says Mark Herndon, chair of the M&A Leadership Council. The Council surveyed 50 worldwide dealmakers, and found that instead they’re doubling down on their core markets. “Less than half were looking at distressed opportunities.”
- The new normal also finds more companies who had stayed out of the M&A scrum before now plunging in. “We see a lot of ‘net-new’ acquirers seizing on growth through acquisition today,” notes Herndon. Over the past 2 months, Herndon and his team have met with companies as small as $100 million in revenues who are venturing into first-ever acquisitions.
- A quick comeback for M&A activity, plus a very different deal ecosystem, means the smartest, fastest-moving dealmakers come out on top. Before your board starts weighing opportunities, now is the moment for a close review and upgrade of your organization’s dealmaking capabilities. “Unless you’re ready to move now, you may be left behind,” counsels Herndon. There is lots of private equity and SPAC funding that needs to be spent, and “they have sophisticated teams that can beat a slow-moving corporate team.” Review your due diligence, finance, and other capabilities, and assure you’re ready to jump.
- Indeed, if you’re serious about making M&A a strong strategic element now, Herndon advises investing in specialized talent to make it happen. “We looked at organizations that assigned staff to M&A internally, beyond just their ‘day jobs,’ and found they had a 30% improvement in doing deals.” This dedicated skill is not just vital to vetting deals, but the even more tricky task of integration and value capture afterward.
- Shakeups in the world economy shift not only what makes a target company more valuable, but what makes your own internal assets less valuable. “Some of your legacy cash cows may not be where investment should be going forward,” Herndon says. “Most companies don’t divest enough.” Your board should expect searching analysis of what’s it smart to jettison now as well as what to acquire, and realize that talent for this is also specialized. “Divestiture is not just acquisition spelled backwards.”
- Final tips for board M&A review now. “Leadership teams tend to shade deals into overgeneralizations too much. I would ask how are you resourcing this deal, and what are your other top 5 or 6 value capture initiatives.”
RALPH WARD’S BOARDROOM INSIDER is published monthly for directors, CEOs, those who work with corporate and nonprofit boards (corporate secretaries, corporate counsel, support staff, and consultants), and board prospects.