The global crisis caused by the novel coronavirus (COVID-19) has curtailed many activities and industries around the world. Among sectors of the economy coming to a screeching halt is mergers & acquisitions. What already started off as a slower year for M&A has gone almost entirely quiet, with the closing of announced transactions likely to be delayed, deals in progress called off and little appetite among potential strategic partners for exploring transactions when many companies are focused simply on survival.
Nothing chills M&A more than uncertainty, and we are certainly in an environment of unprecedented uncertainty. There’s the uncertainty of the pandemic itself: how far will it spread, how many will become sick and how many will die, when can a vaccine be safely implemented, will we see secondary outbreaks, etc. Then there’s the uncertainty of the financial fallout: how bad will the COVID-19 recession be, how long will it last, will government bailouts and other forms of intervention make a difference, which industries will be worst impacted, etc. And, finally, there’s specific uncertainty around M&A in this environment: will financing be available in these market conditions, will regulators be willing (or even able) to approve deals, will the business of either company remain stable enough that there’s value there to realize, etc. All of these factors contribute to the likelihood that strategic friendly deals will be rare until conditions stabilize.
But economic disruption and volatility of the stock market often create an environment in which certain kinds of M&A prosper as the economy finds its footing again. Deals like private equity buyouts, private investment in public equity (PIPEs) and spinoffs all are likely to command a big share of the M&A volume. It is also likely that hostile M&A grows.
Why hostiles? Hostile transactions are nurtured by fundamental disagreements about valuation and future growth prospects: the would-be hostile acquirer hopes to convince either its target or the target’s shareholders that the value its unsolicited bid provides is greater than the company can achieve as a standalone entity – and it typically turns hostile precisely because the target disagrees. Market dislocation always heightens this kind of disconnect between buyers and sellers. In a world being reshaped by COVID-19, we can expect to see a new dynamic of haves and have-nots. Those firms that have the capital strength to expand are dusting off “wish-lists” of potential targets, which are now priced much more attractively. Those in a weaker position need to recognize their vulnerabilities and consider what they can do now to either discourage or prepare for hostile action.
If you’re contemplating making an unsolicited bid, what should you be thinking about from a stakeholder communications perspective?
- Valuation Recovery Uncertain: Closely evaluate the target shareholder base and consider how you can convince those investors that your offer provides the best and most certain value in an uncertain time. Many may think that a return to lofty valuations are just a few months away; you need to help them recognize that is a very dicey proposition.
- Best use of Capital: Do not lose sight of your own investors. Reassure your shareholders that this is a prudent and effective use of capital at a time when some may be focused solely on preserving capital. Be sure to advance a view on the valuation of the target company that does not undermine your own standing.
- Politics will be Everywhere: Elected officials and regulators are increasingly likely to view a hostile deal as unnecessarily disruptive and socially unacceptable. That could lead to disruption of the deal and the approval process. Instead of focusing solely on investors, be sure to proactively educate regulators and political leaders about the benefits of your proposed transaction.
- Remember the Power of Employees: Historically employees are not a core focus in hostile deals. It is often a battle of convincing investors. In this day and age, however, employees have growing influence over corporate decisions and they are often also shareholders. Be sure to bring along employees of both your own company and the target, helping them understand that a combined company will be more stable and better positioned for the future, which is ultimately beneficial to all stakeholders.
If, on the other hand, your company becomes the target of an unwanted suitor, how can you defend in this environment?
- Prove the Timing is Wrong: First and foremost, recognize that it’s not going to be enough to just condemn an unsolicited offer in this environment as “opportunistic.” While that will surely be true, shareholders watching their stock plummet will need stronger motivation to reject what they see as greater certainty of value. Instead you’ll need to offer your shareholders a better long-term strategy for valuation. This is a real challenge right now. Many companies have withdrawn or plan to withdraw prior earnings guidance and retreated from making any predictions about the future. Balance understandable caution against the need to provide some sort of vision of how you will create future shareholder value.
- Go on Offense Quickly: Even more than in usual times, you’ll want to take the fight to the aggressor, challenging their own stability and ability to deliver what they promise. Question their track record, their assumptions and the wisdom of trying to digest and integrate an acquisition on a hostile basis in a hostile world.
- Politics is Everywhere…and that’s Good: Regulators and elected officials often play a very limited direct role in unsolicited and hostile deals. They can be highly influential though in slowing or undermining the confidence of a would-be bidder. Effective stakeholder engagement with employees and customers can help persuade key elected officials to speak out in your defense.
- Stakeholder Defense: The rise of ESG has not crossed the world of hostile deals in a meaningful way yet, but the current crisis may be the catalyst to make that happen. In this new era defense won’t be simply about mustering the support of shareholders alone. Employees and customers need to buy into your vision for the future and can play a meaningful role in affirming an ESG driven defense that seeks to resonate with large portions of your investors.
Whichever side you’re on, in this climate a hostile transaction is unlikely to go under the radar. With M&A scarce, even the smallest proposed transaction will draw outsized interest from the financial press, and might generate headlines more broadly, as it plays into (or against) narratives about corporate “profiteering,” the impact of the federal bailout, and the balance of the free market against the public interest.