M&A During Times Of Crisis

“Global events have an inevitable impact on M&A activity, but, with so much capital in the markets, we do anticipate the ‘boom’ is unlikely to slow down any time soon,” says Maurits Hesseling, Board Member of Translink International and Managing Partner of Translink Benelux. In times of major upheaval like a global pandemic or war, his greatest advice to business owners is to analyse their businesses to identify prospective threats and weaknesses.  

He says that typically, major events that impact the M&A markets tend to be natural disasters, war and, of course, global pandemics. Impacts on global superpowers have implications for everyone. One only has to think of the 2001 terrorist attacks in the US that shook and changed the world. The impacts are also compounded when the country in question is a leading source of natural resources and commodities.   

The current situation 

Questions around food, energy and inflation are top of mind. Russia is, of course, a major supplier of gas in Europe. Consumers across the board are going to be affected by the rising price of gas and oil. Russia is also called Europe’s grain basket. Now is the season for seeds, but farmers can’t plant. That has big implications for food security, with impending shortages the world over. Specialty commodities will also be affected. A lot of the world’s nickel comes from Russia, which is imperative for electric vehicles. War disrupts supply chains in myriad ways; it pushes up the prices of materials and jeopardises their delivery.   

Hesseling says that despite the unquantifiable loss, major events can also catapult unforeseen progress. In this case, perhaps accelerated innovation in the new alternative energies space. Certain companies may be able to capitalise on this. Increasingly, cyber warfare is becoming ubiquitous. This means there are also opportunities for innovative cyber security ventures, along with the information and communications technology (ICT) industry. From a cross-border deal perspective, there may also be unexpected opportunity as Eastern and Western Europe find synergies over their political sympathies and cooperate more closely than ever before. 

Forecasts for M&A activity 

Inflation is something Hesseling is watching closely. “Interest rates have been negative over the last couple of years, based on the FED and ECB. Although an increased interest rate was on the agenda even before the war, it still means the cost of lending is increasing. Higher capital costs will result in lower return on investments, which usually directly translates into a lower valuation of companies.” He says this may slow M&A activity slightly. “But the availability of cash is so strong, there’ll still be higher demand for companies than there is supply. This means that for the next twelve to twenty-four months, we anticipate M&A transactions to stay strong. There may be some evening out, after that.” 

Hesseling says this means that if you have a company right now, you may have four to five private equity companies competing to acquire it. “If you have a lot of funding, you need to spend it to make any kind of return…” 

Advice for business owners in moments of big change 

Recently, Hesseling advised a businessowner who makes and sells specialty lab instruments to laboratories and universities. Previously, he sold a lot of products to Russia. Hesseling helped him assess the impact on his company and diversify into complementary product lines in new, previously unexplored markets. “When big events happen, I suggest businessowners start by examining the impact on their companies. What is this likely to be? What will the impact be on your profit? On your deliveries? On the way you produce your products and services? Paint a picture for yourself. And create multiple scenarios for how to deal with it, in depth. 

“If you want to sell your business during a time of dramatic change, you must understand the impact of the event for your profit and performance. Then, you’ll need to be prepared to discuss this with a potential buyer, so you can find a mutual agreement on a way forward. Translink always assesses the position an individual company is in, as well as the influence of global events, to advise on whether it’s an optimal time to buy or sell.  

It’s important to be aware of the MAC-clause, a clause which aims to give the buyer the right to walk away from the acquisition before closing, if events occur that are detrimental to the target company. 

“We’ve seen this called on a lot since the advent of COVID-19.”  

A final consideration with periods of profound change is the emotional impact. Uncertainty and tragedy can cause big disruptions in people’s personal and professional lives. For example, COVID-19 caused major changes in the way we work. During these times, people need reassurance and open communication. It’s important to think of the ‘softer’ impact as well.  

What about cross-border deals? 

Hesseling believes that the current Russia-Ukraine situation may have changed the relationship between Eastern and Western Europe, “We’re seeing a lot more understanding and cooperation, with many Western European markets now willing to invest in Eastern European markets.” Again, he emphasises all deals need to be examined on a case-by-case basis, with individual business owners analysing their companies’ strengths, weaknesses, and prospective threats, under the influence of a big global event.