2019 was a banner year for M&A but things are different in 2020, the year of the pandemic. The M&A (mergers and acquisitions) market has been all but crushed by the coronavirus crisis.
Not surprisingly, the number of U.S. mergers and acquisitions dropped off a cliff in the first quarter of 2020, with volume down 25% compared to the same time last year. Globally, it’s the same story, with a 35.5% decrease in volume for Q1. In the Americas, the decline in volume is sharpest, at 50.2% compared to last year.
Nobody really knows how long the crisis will last, which means businesses who want to weather the storm will have to adjust to a new normal — including those who were involved in the M&A marketplace already or who are currently considering their options.
Already, there are corporate leaders who view the current situation as an opportunity, even through the fog of uncertainty that characterizes the business climate right now. They visualize the pandemic as a chance to create value through deal-making and to emerge from the COVID-19 crisis fully adapted to a new normal and ready to move forward in the changed landscape.
Many are big tech leaders but, as you’re about to see, you don’t have to be in Big Tech to leverage the current situation to evolve, through new deals and partnerships, to a new normal.
First, let’s look at M&A through the eyes of Big Tech. That may help others learn how they can adjust their outlook on M&As to seize opportunity in a rapidly changing world.
COVID-19 won’t stop Big Tech from making deals
While the picture has been bleak so far as the pandemic has disrupted most deal-making, there are a few hotspots of activity. Leaders in big tech, for example, view the pandemic as an opportunity to acquire smaller start-ups that bring new products and markets to the fold.
Pandemic-related surges in demand for gaming and cloud computing, for example, make companies in those fields look very attractive to big tech buyers who are in the market for value-creating M&A. Case in point: in a world where social distancing is the norm and schools are closed, social media is playing an even larger role in keeping everyone connected.
Last month, in a widely publicized deal, Facebook acquired Giphy.
What Zuckerberg and other tech leaders like him are doing is looking ahead and visualizing what the new normal will look like, then adjusting their business strategies, including their M&A strategies, to accommodate the trends they’re seeing.
In many cases, they’re able to rethink what it means to have a competitive advantage in the post-COVID world. What will matter to their customers? Which trends are temporary and which trends will become fundamental changes?
Opportunities await those who can see them
You don’t have to be Facebook, Apple, or Google to benefit from a changed landscape post-COVID-19. There are opportunities for any company to make strategic shifts through M&A activities, if they have the resources. Just ask yourself, in terms of M&A, what type of value can be acquired that will help my company thrive in the new normal?
There are three types of value, each of which serves a different purpose and achieves different goals:
- Scale up by acquiring a competitor
- Broaden the offerings or expand into a new market by acquiring into a new product
- Acquire new capabilities on the back end, like digital tools, new platforms, etc.
The opportunities to create value are there, especially when a new acquisition or partnership falls under that last category. New capabilities can help digitally transform or innovate a new business model, which is often high up on the priority list of companies who are determined to adapt to the new normal. In a Harvard Business School survey of C-level executives, 23% sought to target new technologies and solutions via M&A.
It’s this type of M&A, acquiring technical capability, that presents an opportunity for a wide range of businesses and which, in my opinion, is the most exciting and most promising area of M&A right now, in the current business ecosystem.
Buying capability for the post-COVID world
The pandemic has made it clear that businesses who want to survive have to adapt quickly to new circumstances. Restaurants converted their kitchens and their staff to create new business models focusing on take-out and curbside pickup.
Retailers beefed up their e-commerce operations with new or better online platforms and better payment systems. Utility, real estate, and insurance companies quickly converted to online customer service channels, shuttering their offices and minimizing in-person transactions. Healthcare expanded telehealth options.
In that same vein, companies will also have to rethink their M&A transactions, looking ahead as Facebook did, to how their objectives will change. For most, that involves some degree of digital transformation. Every business is different and each will be seeking to improve profitability in its own way. But largely, digital transformation initiatives like the following will emerge as the new hot opportunities to focus on in M&A:
- Upgrade/install payment systems that facilitate online transactions
- Increase customer loyalty through digital channels with better customer-facing apps, and digital tools
- Improve customer service with better back end platforms and integrations
- Tighten up and shorten supply chains by focusing on partnerships with nearshore companies
- Improve supply chain visibility with better software
- Improve operations by acquiring new analytics capabilities or automation technology
- Grow e-commerce channels by acquiring platform-management capabilities
- Improve last-mile operations in the supply chain by collaborating with technology providers specializing in logistics
Any M&A deal that pulls a company forward into digital transformation is bound to have a positive impact, but only if company leaders have taken the time to understand what the new normal looks like for them.
Look into how COVID-19 has impacted your users, how their behaviors have changed, how they will be spending their money, or what they now expect from the brands they do business with. In the answers that you find, I can predict that digital transformation will play a role in how well your company responds to changing consumer habits.
The new digital tools, platforms, talent, and capabilities that you adapt during the aftermath of this crisis — these are your growth spaces for the future. They will serve as guideposts for how you will reshape your M&A strategy. They will also be the key to how you adapt to the new normal, once this pandemic is behind us and we forge ahead to a brighter, better future that serves the customer better and creates resilience for your company.