Deal-makers preparing for a very different world

As expected, we saw a bounce in activity as management teams made the most of the opening provided by the General Election and the greater clarity that emerged over Brexit.

Yet, what a change we’ve seen. Now, we live in a very different world.

With such disruption reaching into all parts of the economy, deal activity has generally stalled amidst the public health crisis. But, that’s not to say deals aren’t still moving – there are pockets of promise.

In the short term, if a process was already well progressed in early March – notably those having reached exclusivity, there is still a lot of energy being put into getting these deals completed.

The current climate has also magnified interest in a host of sectors that are underpinning the economy right now, such as healthcare, logistics, energy & renewables, online retail, financial services, insurance and IT and communications technology. While we saw interest in these areas long before we knew what the terms ‘furlough’ and ‘viral load’ meant, market dynamics are accelerating the trend.

Beyond these ‘hot sectors’, it is likely that distressed M&A will also take the limelight over the coming weeks as balance sheet and working capital struggles entice investors bearing rescue packages in return for equity.

Furthermore, companies coming off the considerable aid provided by the Government – such as the Jobs Retention Scheme and rates holidays – will likely drive a second wave of distressed deals towards the end of May. A parallel in the public markets might be an uptick in ‘public to private’ deals as buyout houses and well-resourced corporates capitalise on depressed prices.

In the meantime, for everyone else, we still see appetite to secure investment, exit or explore acquisitions – which is the lifeblood that helps keep capital circulating around the economy and driving growth. August is typically a quiet time for dealmaking, but it could be a bumper month if the crisis eases before then.

As such, the summer will be filled with prep work to get processes ready and in fine shape ready to get deals done.

A core part of that work will be in determining where a business has reached in its response to Covid-19 – something that is of interest to investors, lenders and trade buyers. Equally, management teams will be eager to get an understanding of how they compare to others and what the path ahead looks like.

From a corporate strategy perspective, it is best to think of that journey in four phases – and helpfully, four (almost) Rs: Reaction, Resilience, Recovery and New Reality.

The Reaction stage is something that we’ve all been going through where organisations have to make those tough first decisions and actions to protect their staff and business.

Next, the Resilience stage is about building a stronger business that can better withstand the crisis. Here, companies should be settling into support schemes and progressing from initial conversations with lenders, advisers, HMRC and other stakeholders. This is also when forecasting is important and is a time for pulling together robust cashflow forecasts.

Only then can management teams indulge in considering how to create a business for the future. This Recovery phase should see leaders make positive steps towards that vision. That means preparing for how their sector will change and what it will demand of them.

All this leads to the final stage, the ‘New Reality’. The economy will emerge from this crisis in a different shape from when it was plunged into it. The most attractive and successful businesses will be those that are ready for that world – whatever it might look like.

They’ll likely be the ones to drive a new wave of investment and consolidation and get the M&A market back up and running.