The impact of COVID-19 on M&A and strategic growth

(Sponsored article) The COVID-19 pandemic has hit businesses around the world particularly hard, with both government-enforced shutdowns and changing consumer behavior impacting revenues. The virus disrupted deal making, writes Marc Bain for Quartz, as it “roiled financial markets and left firms trying to stabilize their businesses”.

Once the situation settles and a way forward emerges from the murky depths of the pandemic, it’s likely those well-capitalised players and private equity groups will snap up companies left vulnerable by the crisis – and at bargain prices, too. British fast fashion retailer Boohoo has already noted it has its eye on struggling rivals.

Deal activity is likely to increase as the year progresses, and as M&A activity picks up again, it’s predicted that a number of themes will emerge:

• buyers will become more assertive
• some companies will emerge weaker, leading to forced sales to realise cash or allow for an exit
• the volume of opportunistic, stressed or distressed M&A opportunities will increase
• the record levels of capital held by private equity houses will need to be deployed, with it likely to be for bolt-on acquisitions to protect portfolio companies
• smaller listed companies may want to go private as a way to reduce their regulatory burden; depressed share prices may take the choice out of their hands.

With the markets in a state of flux, M&A activity becomes more risky – even if the target is struggling to keep up. It’s here that the general counsel (GC) plays a crucial role.

Traditionally, the GC has tended to be more reactive, only stepping up when called upon in a crisis or once the business strategy has been decided. Yet more and more GCs desire to play a more significant role in such decisions, including when M&A activities are on the table.

And so the general counsel must ensure that – whether buying or selling – the organisation’s house is in order before M&A activity kicks off. Preparation is key to a successful M&A, helping to eliminate or minimise possible issues in a future deal.

A central source of truth for all entity data can make this preparation and audit process much more streamlined and straightforward; with modern entity governance processes in place, any interested parties can get a real-time view of the state of the entity in question. These centralized records can also help the GC to advise the board on potential areas of growth within the legal structure, such as a market with no presence, and on areas the organization can consolidate to help drive that growth.

Without getting the house in order, organisations run the risk of the M&A deal going sour. McKinsey estimates that around 70% of mergers do not achieve their expected “revenue synergies”. Boards can get so carried away with the excitement of the deal that they forget about day-to-day operations needing attention.

There’s also the issue of integrating two businesses, with two different compliance processes and two different cultures. These issues are not something that can be addressed overnight, and need careful attention.

But more than this, taking on another business means taking on its reputation, its legal history and its regulatory history. Without due diligence into the full background of the M&A target, organisations risk finding themselves at the mercy of the markets and the media later down the line for something they inherited.

This is why the general counsel needs to be among the leads on M&A activity. By getting the internal house in order through entity management software and a single source of truth, the legal and compliance department can help to minimize the risk of these deals, whether they’re the target or the buyer.

Diligent Entities helps to create a single source of truth for entity management, ensuring the right information gets to the right people at the right time and in the right format. This approach to entity governance can better position the general counsel to lead strategic M&A activity, and play that crucial proactive role in driving organizational growth.