Virtual dealmaking in a post-pandemic world
What have successful deal-makers done differently during the pandemic that’s here to stay?
"Over the last few quarters, we’ve seen deal volumes surge across sectors, including in technology, which never stopped for the pandemic at all,” says Flora Wan, a partner in Deloitte’s Transaction Services practice.
Mergers and acquisitions (M&A) activity can be particularly resilient in its adaptation to new ways to transact, provided the fundamental conditions exist for favourable economic growth and access to capital. If you had told dealmakers before the pandemic that they could get multimillion-dollar transactions done without having to look anyone in the eye, they would have laughed you out of the room. Yet, deals have been happening at a breakneck pace.
According to Deloitte’s Global M&A insights lead, Sriram Prakash, in the last twelve months endling June 2021, globally companies announced $4.2 trillion worth of M&A deals, this is the highest ever M&A activity recorded over a 12 month period. The resurgence in M&A is truly remarkable given the pandemic uncertainties and dealmakers had to rapidly adopt to executing deals in a virtual environment. Corporate confidence started to pick up once there was a possibility of a vaccine-led recovery, in fact $63 billion in deals were announced in the week following the first successful vaccine was announced.
Deloitte expects these market conditions continue to be ripe for a vibrant M&A market - the International Monetary Fund (IMF) has predicted a stronger-than-expected post-pandemic economic recovery, credit markets are buoyant and debt is available at attractive terms, the IPO markets were robust, led by a wave of special-purpose acquisition company (SPAC) listings. We can expect strong competition for attractive assets, the corporate sector is sitting on nearly $3.8 trillion in cash reserves, private equity firms have $2.5 trillion of dry powder, at the same time HNW family offices and sovereign wealth funds are rapidly emerging as a new force in the M&A markets.
M&A trend predictions
As many of the world’s largest economies begin to emerge from public health-related lockdown conditions and limited travel is permitted, what pandemic-era trends do we anticipate will stay?
1. Efficiencies learned through the mass adoption of technology platforms for workflows and communication, but face to face is not gone
In the competition for quality assets, investors will have to balance the competitive advantage of speed and coverage that virtual interactions facilitated with the edge that might be gained from relationship-building in person. “My prediction is that more deal execution and more of the overall M&A life cycle will continue to be conducted without extensive travel or face-to face-meetings—by choice,” says Flora.
While the allure of prospecting new relationships in person is real, as is the benefit of social interaction when striking alignment during intense negotiations, the opportunity to cover more deal opportunities in an upcycle M&A market will not be lost on savvy investors. Flora sees many transactions between proprietary parties these days, who capitalize on longer-term vertical or industry relationships without going to broad auction. This signals an interesting entrenchment into known relationships to maximize the current market opportunity of ample dry powder and financing sources. This behaviour is expected to continue even as we emerge from the pandemic. But it doesn’t mean investors are using in person vs. virtual communication channels in the same way as before the pandemic. Most people with young families have relished the reduction in travel. Many deal makers have relied on the speed of virtual interactions to triage through record numbers of deal opportunities. The investment banking community is learning to leverage broadcasts to access more bidders at auction.
2. Virtual marketing of deals, diligence, negotiation, and closings are here to stay too
Alex Baril, Deloitte Canada’s Transaction Services leader, says that significant virtual M&A marketing is here to stay. But, he adds, meeting people is not a thing of the past. “Deals are very human in nature, especially where immediate post-deal integration or synergy opportunities require close collaboration and partnership among buyer and target teams. It is most likely that a hybrid model will emerge to further accelerate the speed at which transactions are done in North America."
3. Surging appetite for big data
Perhaps as important a trend as the market’s growing comfort with video conferencing is the surge in appetite for big data, which in fact predates the pandemic. Transaction execution is supported by more seller-disclosed data and buyer demand for data proofs than ever before. With analytics tools rising in prominence some four to five years earlier, larger volumes of data have taken the spotlight. That’s especially true with private equity investors involved, be it on the selling or buying side. Data can tell a visual story that is now expected to accompany traditional in-person management meetings.
Use your network a different way
While relationships may always be important, how people form them will continue to change. The very fibre of our workforce is changes as companies reconsider how and if they will repatriate employees into central office locations after the pandemic. Similarly, our expectations of face-to-face interaction in building trust for transactions have shifted dramatically.
Networks and trust will increasingly be formed through brand, expertise, and interest, and less through location. Specialist access to get the insider’s scoop on investment opportunities within a sector, or use of expert networks where retired executives might serve as industry advisors are even more relevant today than before.
Savvy dealmakers have leaned heavily on the networks of major firms during the pandemic months, and will likely continue to do so.
Get more efficient
We’ve realized that we don’t have to visit a site or a facility in person anymore to get a good look at it. Deloitte has flown drones over buildings for clients to assess a target’s facilities, while numerous third-party companies have started up that can visit sites on an acquirer’s behalf. We call this doing your diligence from home.
It’s also much easier and less time-consuming to meet with multiple bidders. Before the pandemic, we’d hold individual in-person meetings with a host of potential investors for a client looking to sell. The target company, along with the seller’s management team, would make the same presentation to each investor one after the other, an onerous activity that took executives away from all their other responsibilities.
These days, investment bankers might broadcast one webinar to all potential investors simultaneously. And unlike in the past, where bidders would all show up at the office to pitch their offer at the same time, no one knows who else is watching or scanning the logbook at reception to find out who the other bidders are. The more serious bidders can now be invited to a more detailed meeting, possibly in person.
“Everyone benefits from this,” Alex says. “You can potentially entertain better bids because more parties are receiving more information at the earlier stages, while you only have to talk to a subset of bidders later on."
Protect your investment
Some companies may be concerned that without regular face-to-face meetings, they’re opening themselves to more risk. Alex has noted increasing interest in representation and warranties insurance, which can protect a company against losses from a breach of representations and warranties in an acquisition agreement. If something goes awry, the counterparties to the deal would settle with their insurer instead of having to go to court. “This is why we are seeing significant changes in transaction documents like sales and purchase agreements (SPAs), transition services agreements, and shareholder agreements,” says Barbara Morelli, a partner who leads Deloitte Canada’s SPA and M&A disputes group.
Companies can also structure share purchase agreements so that a buyer who didn’t get an opportunity to inspect something in person can hold back on some of the proceeds of a deal until they’re confident that what they’re getting is as advertised. “There are multiple things happening now that make it more acceptable to do the bulk of transacting virtually, while managing your risk on the back end,” Alex adds.
These trends that were inspired or accelerated by the pandemic should make dealmaking both more effective and more enjoyable. No one needs, or wants, to travel six hours each way for a one-hour meeting anymore.
“People want more personal time and they want to do things more efficiently,” Alex says. “And while not all interaction will be replaced by online—as people will always want to seal the deal with eye contact—virtual is going to give people the option and possibly a faster path to their objectives.”