As M&A activity crashes under COVID-19, best practice tips in the current crisis

The COVID-19 pandemic has had a disastrous impact on global merger and acquisition (M&A) activity as deal after deal has been put on hold.

The latest figures from data and analytics firm GlobalData reveal that transaction activity in the first quarter of this year was down 26% on the same quarter in 2019. with the crisis already starting to have an impact on deal levels as early as March. The total number of transactions here came in at 1,984, down from 2,339 the month before. The corresponding deal value also dropped from $151.2 billion to $129.9 billion.

But worse news is potentially yet to come, believes Jonathan Boyers, KPMG’s head of M&A:

Trading is deteriorating and transactions may need to go on hold for quite a long time. Where deals already have momentum, are in an advanced state or fit specific criteria in some way, they’re likely to get over the line and will go on to complete. But depending on the dynamics of the sector, many deals that are in early or mid-process will be put on hold as trade continues to deteriorate.

The main transactions over recent weeks have taken the shape of distressed sales. But given the key role the tech sector has played in helping organisations to digitise swiftly in order to survive, it is one of the few that still appears to have any life in it. However, Boyers still points out:

Some US tech investors are saying they still have an appetite and will carry on, but given the current circumstances, it’s quite a big thing to launch a process right now.

Nonetheless, he believes a good number of delayed transactions will still be ready to go to market as and when conditions recover, which he estimates is likely to be by the end of the year.

As for those organizations that find themselves in the tricky situation of already being in the middle of an M&A today though, there are a couple of options. The first is to acknowledge there are not enough people, resources, time or energy to proceed with integrating the two entities involved and to simply postpone it until the business climate improves, says Paul Zonneveld, co-author of ‘Emergent: The Power of Systemic Intelligence to Navigate the Complexity of M&A’.

The second is to go ahead with the integration work but move forward more slowly than would normally be the case. This was is approach taken by Dean Forbes, Chief Executive of CoreHR, which was purchased by business software provider Access Group in early March in order to create a new £100 million HR and payroll business named Access People.

A more considered approach

But there are inevitable upsides and downsides to going down this route. In terms of disadvantages, Forbes says:

What COVID-19 has done is rob us of the opportunity to bring people together from both sides on a face-to-face basis to work out how to take things forward. We’ve done our best on Zoom, but it’s not moving at the same pace. I’ve also met maybe 10 people by videoconference but you lose value as you’re not bumping into others informally and exchanging ideas in the corridor.

On the plus side though, Forbes points out, it is possible to take a more considered approach as there is more time to gather data and have time to think than would usually be the case. He explains:

Under normal circumstances, we’d have done the deal and then all be panicking to ensure we exceeded revenue expectations. But the ability to do that has now been taken out of our hands to a degree. It’s negative for the business overall, but it’s beyond our control, so it gives us time to ensure the strategy’s right, the right talent is in place and the like.

While at a “mechanical” level, the integration of things like IT systems and HR processes is “moving full steam ahead”, on the more “strategic” product side of the equation, the company is exploring ways to package up its software “in a meaningful way so as not to confuse customers”, Forbes says.

To this end, rather than simply bringing the head of product at Access Group and CoreHR together to make key decisions over the space of a couple of weeks based on input from a limited number of people, it has set up a series of “splinter groups” to better support such decision-making.

These splinter groups consist of 12 people from both sides who work with individual products on a day-to-day basis to “go through everything and triple check that our assumptions are correct”. The “first pass” was completed at the end of April and a definitive outcome is expected to be in place by the end of May. Forbes says:

We wouldn’t normally have done this as we’d be desperate to move at pace. But although it takes longer, it’s a better approach as it’s more in-depth and inclusive and will certainly drive a better outcome at the end.

Mieke Jacobs, the other co-author of ‘Emergent’, agrees, not least because taking a more measured approach enables staff on both sides to integrate what is occurring too:

Slowing down gives people more time to digest what’s happening and allows them to feel more involved. Often with M&As, people are still connected to the past and it’s amazing how long it can take to come to terms with change if there’s no space to process it. There are many consequences of this, but one of them can be that processes are not integrated in an optimal way as there’s sometimes unconscious, silent sabotage of what you’re trying to do.

Integrating people effectively

However, simply asking people what they would value being retained from the old regime, acknowledging that “some things are going to be done away with rather than excluded in silence” and then honouring their contribution, can make all the difference, says Zonneveld.

Indeed, in Forbes’ view, integrating people is “for sure” the most difficult part of the equation. While at a senior level, team calls via Zoom, which consist of both formal and informal interactions, have proved “helpful to get to know people a bit”, it’s still a lot less effective than meeting face-to-face, he says.

The organization also holds ‘all-hands’ town hall meetings once a week, which include live question and answer sessions, to keep employees from both companies up-to-date on how the integration process is progressing. There are also informal events, such as virtual drinks and quiz evenings, to help build a sense of community. But says Forbes:

What is absolutely missing is the photosynthesis of new ideas that comes about, for example, when engineers are working on two separate things but start chatting and spark off each other. We’ve got a defined structure, which works if people already know each other or are brought together in splinter groups, but accidental collaboration is difficult.

He is also aware of how much anxiety an M&A situation can generate at the best of times among staff, something that only increases when the uncertainty generated by the current crisis is added to the mix. As a result, the company has spent a lot of time and effort in devising a comprehensive communications strategy to ensure employees are kept in the loop. Forbes explains:

We identified the ways in which people would normally seek and get information, and which of those avenues are gone or have become harder to access. For example, content would normally be made available on the intranet and even if not everyone read it, it would be passed on by word of mouth. But we recognised this wouldn’t happen now and so engineered our communications approach in response.

Ultimately though, what all of these considerations illustrate is just how vital getting the people side of the equation right actually is. As Jacobs concludes:

It’s naïve to claim that other work streams aren’t important, but often the people part is what makes the difference between an M&A’s success or failure. For example, there’s the self-sabotage issue or a potential loss of critical talent if things go wrong, both of which can hamper cultural integration and mean you won’t get optimal value out of the transaction.

My take

While effective operational, process and product integration are undoubtedly vital to the success of an M&A deal, the people and cultural element has all too often been ignored. But in responding to a COVID-19 crisis, in which the focus has been, and will continue for the foreseeable future to be, on people, companies unfortunate enough to be caught in the middle of a transaction need to ensure they take extra special care in this regard.