During economic downturns, valuations drop and dealmakers rightly expect a shift from a sellers' to a buyers' market. It is uncertain whether this will prove to be true for the COVID-19 recession. Among other factors, it will depend on the extent of promising acquisition opportunities and the availability of stimulus money (both from government and other financing resources).

While private equity funds show a great appetite for investment opportunities and are likely to spend vast amounts of money, strategic buyers have other objectives and must act more diligently in preparing their shopping tours.

This article highlights how in-house M&A strategists can navigate present acquisition challenges and looks ahead to what the European M&A market may look like in the years to come.

Follow systematic and deliberate corporate strategy

Strategic buyers will revaluate their acquisition roadmaps underlying their overarching growth strategy and update their target lists essentially around the question of whether to invest in organic growth (ie, new business models, technology and products) or whether the same could be achieved through expansion deals (but only if those transactions effectively expand their business scope and get them to the goal faster). Corporates that follow a systematic and deliberate corporate strategy clearly know how M&A could enhance their core business and thus have an advantage over their peers.

Less market consolidation anticipated

Corporates are expected to pursue markets that proved resilient during the COVID-19 pandemic rather than explore opportunities that are cheap for a reason. This is also why M&A strategists forecast less market consolidation given that transactions that add similar products or customers or other 'more of the same' deals will most likely not fit their post-pandemic roadmap. Two weak companies combined do not create a great company. Therefore, purchasers of weak or distressed assets will have less competition from corporates.

Act faster

As promising opportunities will increasingly be available at short notice or will be offered in a competitive bidding process, corporates will need to act faster than they are used to. Therefore, it is all the more important to have the full landscape of potential targets at hand prior to assessing companies that might not be suitable for the company's strategy. Thus, corporates should be willing to accelerate internal processes and provide more resources for both deal preparation and its execution.

Pursue deals which require selective integration

Corporates will preferably pursue deals which require selective integration only. This approach has been frequently followed by US purchasers which – accepting incompatibilities from the outset – have not always been eager to integrate the businesses that they have bought. Instead, they chose to partner with their acquisitions (eg, Microsoft's acquisition of LinkedIn in 2016). This permits each organisation to focus on what it does best and yet enables buyers to realise value enhancements at the target. It remains to be seen whether purchasers will really recognise the autonomous status of the target and are willing to let it operate independently with existing management being kept in the driver's seat. If this approach prevails, corporates will expend less effort on developing complex integration plans, provided that they are clear on how to create value from the acquired targets without fully integrating new assets.

Anticipated boost in number of transactions and variety of deals

Starting from low 2020 deal volumes (there was a decline by 26.7% compared with 2019 as per Mergermarket's 3Q20 Global M&A Report), executives anticipate a boost in the number of transactions. Similarly, the variety of deals is expected to increase. Instead of pursuing controlling interest deals only, strategic buyers will be more inclined to:

  • acquire minority stakes;
  • enter into partnerships; or
  • set up joint venture structures (with contractual rights to increase the shareholdings in the future).

Earn-outs or deferred payment mechanisms will help to overlook potential weaknesses when acquiring expensive assets such as digital assets, AI or similar growth technologies.

Higher number of asset deals instead of share deals

As strategic buyers recognise things in assets that the sellers cannot see for themselves, the increased deal variety could also lead to a higher number of asset deals instead of share deals. This forces sellers to undergo a cleansing process and carve out single assets or business units for divestment purposes. Acquiring warehouses, factories or other assets is incidentally also what political leaders are longing for, namely to bring back production sites closer to their key markets and reduce supply chains. Notably, digital assets will likely be of value in light of higher cybersecurity needs and machine-learning technologies (raising legal questions of how to properly transfer algorithms).

Need for creativity

Deal making will require more creative elements such as defining formulas that disregard short-term revenue downfalls and make decision makers comfortable with the target company's economic state based on its cash streams in a normal environment. In the short to medium term, intangibles such as digital assets might drive valuation more than financials.