Mergers and acquisitions activity was already off to a slow start when 2020 began, but the COVID-19 pandemic (the “Pandemic”) initially resulted in a further decline in the volume of M&A activity. This was due in part to the economic and commercial uncertainties and market volatility for buyers and sellers alike, which made it difficult for companies to conduct business as usual. However, it looks like M&A activity has picked up again with gusto. In an earlier post, we reported that in a global survey of 2,900 C-suite executives, more than half of them reported that they were planning to enter into M&A activity within the next 12 months. A more recent survey of 1,000 executives at US corporations and private equity investor firms confirms this finding. Once again, more than half (60%) of the executives surveyed said they had more appetite for M&A activity since March 2020.
Given the economic uncertainty in this cash-constrained environment, it is not surprising that more and more companies (42%) are looking to explore alternatives to traditional M&A as compared to acquisitions (39%) in an effort to grow their business. Alternative deals are corporate transactions that are neither classic M&A deals, where a company acquires control of the target, nor are they a classic private equity deal, where a firm acquires control of a company and then later sells it. Rather, these are transactions that don’t necessarily require a large amount of cash, and can take a variety of different forms, such as acquiring minority stakes in a company or entering into cooperative arrangements through joint ventures, alliances, or partnerships. According to a recent report that looked at how the Pandemic may affect future M&A activity, alternative deals have become a critical component in the deal maker’s arsenal and majority of deal makers are viewing these types of deals as important tools to gain access to new capabilities. Alternative deals are seen as an attractive option for companies and it is predicted that they will be used even after the economic effects of the Pandemic subside.
Alternative deals are gaining traction because they are cooperative, negotiated, and there is a lesser amount of risk involved, whereas traditional M&A deals are competitive, risky, and are based on market prices. Both have their advantages and disadvantages, and parties should engage in an analysis to determine which type of deal will be beneficial for the growth of their business. In an earlier post, we laid out the key considerations that are relevant in determining when an alternative deal structure will be more beneficial than a traditional M&A deal. It is important to keep in mind that alternative deals, just like traditional M&A deals, are also prone to failure if the parties do not adhere to a robust strategic plan. For this reason, companies must continuously evaluate each deal to ensure that an adequate plan is in place and that the plan is being followed as the deal moves through different stages. In some instances, this may require strategic advice from legal counsel on how to formalize such a plan to ensure that the parties are committed to and are following the steps involved in the deal.
However, despite the surge in favour of alternative deals, more than half of the private equity firms that were surveyed still expressed interest in exploring traditional M&A deals. This means that alternative deals won’t necessarily replace traditional M&A deals, but rather, companies will have a range of options at their disposal and they should critically assess what kind of transaction is better suited to achieve their commercial goals in the most efficient way.
The author would like to thank Moosa Syed, Articling Student, for his contribution to this legal update.
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