purchase of assets, and management
The Case for
M&A during
COVID_19
“Opportunities are like sun rises. if
you wait too long, you miss them.”
-William Arthur Ward
T he consequences of the coronavirus
disease (COVID-19) outbreak is
unprecedented and felt around the world.
The world of work is being profoundly affected
by the pandemic. In addition to the threat to
public health, the economic and social
disruption threatens the long-term livelihoods
and wellbeing of millions. The pandemic is
heavily affecting labor markets, economies, and
enterprises, including global supply chains,
leading to widespread business disruptions.
The companies that can quickly adjust their
strategies to the economic and humanitarian
shocks of the pandemic will be best positioned
to emerge from the crisis healthy and profitable.
Two decades of research show that a through-
cycle mindset to M&A can enable and even
accelerate these strategic shifts. History has
shown that outperformers actively reserve cash
and invest—organically and inorganically—
through downturns. In this article, we examine
how companies can use M&A to better weather
the current economic storm and come back
stronger in the “next normal.”
What is M&A?
Mergers and acquisitions (M&A) are a general
term used to describe the consolidation of
companies or assets through various types of
financial transactions, including mergers,
acquisitions, consolidations, tender offers,
acquisitions. The terms "mergers" and
"acquisitions" are often used interchangeably,
although, they hold slightly different meanings.
In a merger, the boards of directors for two
companies approve the combination and seek
shareholders' approval. Post-merger, the
acquired company ceases to exist and becomes
part of the acquiring company. In a simple
acquisition, the acquiring company obtains the
majority stake in the acquired firm, which does
not change its name or alter its legal structure,
and often preserve the existing stock symbol.
Why M&A During COVID_19?
Downturns often present good opportunities to
increase the scale of business units, because
suitable targets can be acquired at attractive
valuations. The buyer’s business unit benefits
from increased scale and potential cost
synergies.
Downturn mergers generate
about 15% more value, as measured
by total shareholder return, than
boom-time mergers.
The downturns will change several of the long-
standing rules of the game in many industries.
Exploit your competitors’ vulnerabilities to
redefine your industry through consolidation.
History shows that the best deals are made in
downturns. According to BCG research,
downturn mergers generate about 15% more
value, as measured by total shareholder return,
than boom-time mergers. To capitalize on
opportunities, closely monitor the financial and
operational health of your competitors.
Companies lacking the financial cushion to
benefit from the recession—or even to stay
afloat—may even welcome your advances. In
late 2001, only weeks after the 9/11 terrorist
attacks had brought vacation travel to a near
standstill, Carnival, the world’s largest cruise
ship operator, interceded in the planned friendly
merger of Royal Caribbean and P&O Princess
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Cruises, then the second and third largest cruise value for investors. The company spun off the
operations respectively. Its own bid to acquire snacks business, renamed Mondelez, in 2012.
P&O Princess required persistence—it was 15
months before P&O Princess shareholders What are the firms doing?
finally accepted Carnival’s offer—but the deal
During this downturn, Firms are adopting
turned out to be a smart strategic move for the
different strategies. Boeing, for example, has
company, whose total shareholder returns far
abandoned a $4 billion deal to acquire 80% of
surpassed those of the S&P 500 in the years
Embraer’s commercial jet business and a 49%
following the announcement and then the
stake in a joint venture producing a new military
completion of the acquisition. Of course, you
cargo jet. At the same time, companies such as
will have to ride out the recession carrying the
Google Cloud, Nestle SA, BlackRock, the
baggage of any company you acquire, so due
British clothing company Boohoo, and others
diligence— particularly concerning a potential
have all publicly stated that they are open to
target’s current and future cash positions— takes
acquisitions despite the uncertainty created by
on even more importance during a downturn.
coronavirus.
Downturns often present good opportunities to
A study by the Harvard, found that 51 % of the
increase the scale of business units, because
respondents have temporarily halted the M&A,
suitable targets can be acquired at attractive
14% are not pursuing the M&A, 12% of the
valuations. The buyer’s business unit benefits
respondents are closing last stage deals, 12% are
from increased scale and potential cost
actively pursuing M&A, 11% are unknown or
synergies. In some cases, when the economy
unapplicable.
recovers, the buyer may find that the expanded
business unit can operate on a standalone basis.
To reap further benefits from the newly gained
clarity into the corporate portfolio, the company
could split itself into two or more at-scale, pure-
play businesses.
For example, in 2009, taking advantage of
depressed prices in the aftermath of the financial
crisis, Kraft acquired Cadbury following a
hostile takeover bid. Kraft’s goal in acquiring
Cadbury was to increase the scale of its snacks
business, especially in emerging markets.
Cadbury rejected the initial offer, arguing that its
absorption into a slow-growth conglomerate
dominated by Kraft’s North America-focused The survey is conducted from M&A Leadership Council, which
groceries business could limit the growth queried 50 C-level executives and senior corporate development
leaders about their plans. Respondents included experienced
potential of Cadbury’s snacks business. Kraft
domestic and global acquirers from a representative cross-section
responded by increasing its offer price, and of industries. Respondent company sizes were distributed across
Cadbury’s shareholders ultimately approved the representative revenue segments including 25% greater than $5
deal. Kraft now had two sizable and distinct billion, 20% each from $1–5 billion and $100 million–$1 billion
respectively, while the remaining 35%. had revenues from $10–
businesses—groceries and snacks. The 100 million.
acquisition gave Kraft’s snacks business enough
scale to thrive in the competitive environment
on a standalone basis and clarified the business’s
What should firms Do?
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Successful corporates use deal making to shape,
remodel, or even completely transform their
corporate portfolio. A downturn may not be a
good time to divest business units that are sub-
scale or both sub-scale and noncore. Instead, it
could be a good time to acquire complementary
businesses that would allow a company to
increase the scale or, in some cases, the scope of
such business units. Increasing scale could set
the stage for a subsequent divestiture or spinoff.
A company can take advantage of the downturn
to become a master of the corporate portfolio.
Instead of adding to an existing business or
moving into adjacent ones, a company can use
M&A to change its value proposition in the
market, sometimes radically. A variety of
external forces may compel such moves. These
forces include rapidly changing customer
behaviors, newly emerging business model, and
technological advancements and disruptions.
Such developments have the potential to
drastically reduce or shift traditional profit
pools.
Deals made in anticipation of, or in reaction to,
these forces have a variety of rationales.
Consumer behaviors and demands are constantly
changing and disrupting industries. If you
anticipate such changes in your industry,
consider using downturn acquisitions to
transform your business and adapt to the new
environment. An example of forward-looking,
transformative M&A in a downturn is
BlackRock’s acquisition of Barclays Global
Investors (BGI) in 2009. Through the
acquisition, BlackRock expanded from its core
business of active management into passive-
investment management. BGI included iShares,
a leader in exchange-traded funds (ETF). The
iShares ETF business had high recurring
revenues and low capital requirements.
BlackRock accurately predicted that ETF would
have a major impact on the asset management
industry. In the decade since it acquired BGI,
BlackRock has grown to become the world’s
largest fund manager.
A buyer can tap into emerging revenue streams
and profit pools. It can also acquire skills and
capabilities that complement those it possesses
and are necessary to develop an offering that
addresses changing customer needs. First
movers can often capture the bulk of the
benefits, especially if the new products or
services are scalable or enabled by new
technologies.
A few industries that have gone transformational
changes are retail, media, and entertainment, and
automotive. Additionally, several other
industries—including financial services and
energy—face potential disruptions from
nontraditional entrants attacking traditional
profit pools. For example, oil and gas companies
must find alternative sources of revenue in
response to the increasing scarcity of natural
resources and the shift to renewable energy.
Corporate decision makers in affected industries
should view such radical changes, combined
with the potential for a recession, as
opportunities for transformative deal making.
Downturns are challenging times to manage a
business. As executives focus on short-term
headwinds, they must not lose sight of their
longer-term strategic objectives. It is essential to
be bold and stay the course, even in the face of
negative investor sentiment. The downturn is the
best time to acquire the targets needed for a
transformation, possibly at a discount. Downturn
M&A enables companies not only to react to a
changing environment but also to accelerate out
of the recession when the economy gains
traction. The bottom-line advice for succeeding
with M&A in a downturn is clear: Get off the
sidelines and into the game, but make sure you
are prepared to win.
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References

https://www.investopedia.com/terms/m/mergersandacquisitions.asp

https://hbr.org/2020/06/what-ma-looks-like-during-the-pandemic

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/whats-
different-about-m-and-a-in-this-downturn

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-power-
of-through-cycle-m-and-a

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/a-
blueprint-for-m-and-a-success

https://www.bcg.com/publications/2019/mergers-and-acquisitions-report-shows-downturns-are-a-
better-time-for-deal-hunting

https://www.bcg.com/publications/2019/mergers-and-acquisitions-report-how-to-master-in-downturn