Why companies should be thinking about M&A

We consider the many opportunities that M&A could bring to companies as we emerge from lockdown.

Continuing to pursue their M&A strategy was not the priority for companies (or investors) coming to terms with the initial impact of coronavirus on their businesses or the wider economy. The pause in activity that has followed the lockdown does not mean that they should keep such a strategy on hold any longer than is necessary.

Corporate winners (and losers) will emerge from lockdown. More so than ever, a company might prosper because it operates in the right sector (healthcare and life sciences spring to mind). Or, it has pockets deep enough to weather the storm or the foresight to understand before its rivals how its market has altered (perhaps because of changes in consumer behaviour, supply chains or route to market). While not without risk, such companies can capitalise on their advantages with a bold M&A strategy.

Disposals of non-core assets can enable companies to renew focus on their core business, and address a changed market with improved liquidity, but critically acquisitions can:

• help companies acquire new talent, business lines and IP, grow market share and outperform and outcompete competitors;
• enable the strongest companies to consolidate their market; or
• allow companies to reposition themselves to remain relevant in the future.

There are currently further advantages in considering an acquisition. It is likely that valuations will go down, making additional targets affordable for buyers.

Even more so than usual, nimble cash buyers are very well placed, but there is funding available for the right companies. This is not a downturn caused by a lack of liquidity:

• private equity firms have money to invest;
• listed companies can tap the capital markets. The fashion giant Boohoo has raised £200 million through a placing building a war chest in anticipation of what it considers several exciting opportunities likely to arise in the fashion industry; and
• interest rates are historically low; although banks’ current time and focus is on supporting the day to day needs of their existing portfolio (often via demand for the Coronavirus Business Interruption Loan Scheme and the Coronavirus Large Business Interruption Loan Scheme).

We expect to see an increase in M&A activity throughout the year and look forward to seeing which companies will emerge from 2020 as a corporate winner.