COVID-19 and M&A — What CXOs Need to Consider

Business conditions have drastically changed over the last few months and priorities that were critical few months back may no longer be relevant. As a first step, CXOs should take stock of the here and now, and focus on prioritizing support for existing deals to maintain business continuity. In parallel, they will also need to consider building internal capabilities that may help improve the effectiveness of future transactions.

What you can do now to prepare for later
In the near term the C-Suite has an opportunity to delve deep into where their business stands today, decide what projects should continue or be deferred, and look for opportunities to reduce cost in the near term while building scenario plans from an operational and IT perspective. Some helpful activities include:

• Taking stock of their current integration and M&A project portfolio
• Re-assessing business and operational priorities, liquidity impacts and risk
• Prioritizing existing projects and inflight deals
• Exploring support models
• Examining workforce assumptions

After addressing the “here and now” priorities, leaders should prepare for the future. It will be important to assess the pipeline, understand opportunities to grow and assess new approaches to M&A that support future growth. They should ask themselves two important questions:

1. Does the COVID-19 pandemic reveal any important considerations that demand new acquisition approaches?
2. Are there new technology and operational models that need to be considered to enable resiliency and flexibility for future growth?

CXOs are advised to bolster their IT MA&D diligence capabilities. Greater scrutiny post-recession will be needed to ensure that acquisition targets continue to provide value and live up to pre-close commitments. The “quality” of the diligence effort is as important as the process, a hypothesis or scenario-based decision approach can help organizations link business imperatives with go/no-go decisions. With IT comprising almost 45-60% of an acquisition cost, thorough diligence is essential.

Build in time for compliance and value capture
Diligence will also take longer; the U.S. Federal Trade Commission and U.S. Department of Justice have suspended expedited clearances in connection with federal antitrust approvals required under the Hart-Scott-Rodino Antitrust Improvements Act (“HSR”) for acquisitions of a certain magnitude. In other words, filers will now need to wait at least 30 days before consummating any such acquisitions to comply with HSR requirements. Plan for this additional wrinkle in your timeline.

The pandemic is also driving buyers to link post-closing payment to the performance of the acquisition. An additional valuation ask for more buyers today is in requiring the target to roll over a portion of their equity into the purchase price. Buyers are reluctant to provide full credit for pre-pandemic performance and sellers are equally adverse in reducing purchase price for something that they feel is a short-term crisis. This will introduce greater pressure on CXOs to drive and deliver promised operational synergies. Linking the purchase covenants to specific operational commitments during the integration lifecycle will assume greater importance in this new normal.

These operational commitments have translated into an uptick in representations, warranties, and material adverse clauses. In addition, buyers are also including more “escape clauses.” Failing to account for COVID-related operational realities both in the diligence and the integration plan will result in flawed deal integration schedules and misrepresentations of value.

Consider the needs of your workforce
The pandemic also introduces critical workforce-related risks that need to be taken into consideration while planning for an acquisition. For one, companies need to evaluate whether the targets’ employees are in high risk or containment areas. Additionally, frozen hiring, COVID- or transaction-driven restructuring can have a big impact on employee morale, retention and culture. Identifying, retaining and negotiating with critical employees becomes vital in such an environment. The integration risk posed by the lack of critical internal talent cannot be overstated; this causes an over-reliance on contractual talent who may need greater time to onboard and be productive. This could introduce integration risk, greater rework and missed deadlines.

More to come
This introductory series on the impact of COVID-19 on M&A continues with what CXOs need to do to prepare for the future. The series concludes with a look at the benefits of a cloud-first integration model. Stay tuned.