COVID-19: Rebalance for resilience with M&A

COVID-19: Rebalance for resilience with M&A Covid-19:WhattoDoNow,WhattoDoNext NOW NEXT

The COVID-19 crisis is extraordinary in both its humanitarian and economic impact, but history suggests how M&A will play out. The M&A market contracts, but companies that make M&A moves typically outperform those that do not. Forward-thinking leaders need to act now to rebalance for risk and liquidity, while assessing opportunities for resilience and growth coming out of the downturn. 2 COVID-19: Rebalance for resilience with M&A

Crises trigger an M&A shift The scale of the COVID-19 crisis is unprecedented, prompting global responses from governments and companies and swift resets of Historical M&A market contraction 5 equity markets. in downturns Understandably, deal value and volume However, the drop is historically most Deal count: Deal count: contracted rapidly in the wake of COVID-19. pronounced with mega-deals, whereas Deal value all M&A divestitures Deal volume in the first quarter of 2020 smaller deals continue as companies shed dropped to a seven-year low, down 33% assets and distressed businesses seek M&A -3% from the year before.1 The only mega-deals solutions to solvency. -12% greater than US$5 billion were struck before the crisis became a global pandemic. Other While the challenges are unique to each deals are falling by the wayside rapidly. company, the magnitude triggers many Marathon Petroleum’s sale of its Speedway common M&A questions and decisions for convenience stores fell through after the oil leaders. Actions companies take now will price collapse.2 Similarly, Xerox Holdings impact their current and future viability. In called off its pursuit of HP,3 while SoftBank the coming weeks and months, M&A will -47% Group Corp. is backing away from its move at different paces by sector and planned bailout of WeWork.4 geography depending on how severely each is impacted and based on the certainty of M&A value decline exceeds This sharp drop is consistent with other market demand shifts. We all are facing a economic shocks, where the dip in deal cycle of near-term actions for stability and volume drop due to greater value has approached 50%.5 Liquidity is held strategic moves that will create new futures attrition of mega-deals, while at a premium, valuations fluctuate, credit for companies and industries. many smaller deals continue tightens, and companies focus inwardly. 3 COVID-19: Rebalance for resilience with M&A

What are CEOs asking? How do we survive or How do we assess needs to rebalance for risk, liquidity and resilience? identify what to sell? For many companies, there is a pressing need to shore up the business for liquidity, to mitigate risk or fill gaps in the value chain. At this stage it is critical to stress test necessary short-term reactions against a long-term view, even if choices are potentially limited. Taking a top-down look at your portfolio through a private equity or activist lens can especially help your team identify potential divestitures and gaps to fill, and to validate the focus of the remaining company. For in-flight deals, it is essential to reassess timelines, value theses, and Should we go forward financing to make go/no-go calls. Companies with recently closed deals face extra pressure with in-flight deals? as they try to realize value with added operating challenges such as productivity needs and workforce disruption. Could this spark a wave of industry consolidation? Crises often trigger consolidation in sectors that bear the brunt of the impact, such as the banking and travel sectors during the 2008 Financial Crisis.6,7 17% of public companies Which strategic M&A don’t survive a global downturn.8 Forming a view on who will drive consolidation, who will opportunities merit be consolidated, and how to react is key to making better decisions. Understanding the investment ? potential consolidation dynamic for suppliers and customers is as important as the consolidation dynamic for your direct competitors. How should we leverage M&A to invest for growth in the crisis environment? In any crisis, there are discrete, strategic opportunities to acquire high-quality talent, Do we risk deployment intellectual property (IP) and capabilities, often in distressed situations. For those in a position to acquire, these investments can be critical to long-term resilience while also helping of capital now? distressed companies preserve capabilities and talent versus facing potential insolvency. 4 COVID-19: Rebalance for resilience with M&A

Unique industry challenges shape M&A responses 9 Market capitalization losses since the start of the COVID-19 crisis. Travel & Hospitality: A severe drop in demand Retail: Outcomes vary depending Consumer Goods: While the crisis has led to a short-term surge potentially triggers solvency challenges. With on designation of essential versus in sales for many, it also may reshape consumer sentiments in government support not fully defined, there’s non-essential, but the impact of the long term—including preferences for variety, convenience, potential for consolidations, restructurings consumers sheltering in place is authenticity and premiumization. This could cause companies and bankruptcies. accelerating the trend to eCommerce. to shift their brand portfolios and M&A strategies. -16% -13% -19% -24% -31% Life Sciences: While less exposed Energy:The combination of a drop in to solvency and liquidity impacts, demand and the OPEC supply shock Banking & Capital Markets: Growing pools of troubled/non- the COVID-19 fallout likely creates sets up potential liquidity needs. This performing loans and profitability pressures on net interest new opportunities for virology, -49% could trigger portfolio divestments margins may trigger asset sales and possible consolidations. supply chain, partnering and and acquisition/consolidation of The reactions to the 2008 Financial Crisis helped fortify the virtual healthcare—and a wave of distressed players. industry, but the impact of the COVID-19 crisis is yet unclear. M&A in these areas. Now Next and beyond 5 COVID-19: Rebalance for resilience with M&A

Re-evaluate M&A now and move at speed This is no ordinary downturn: Fundamental changes in consumer M&A returns in downturns behavior, supply chains, and routes to market are knocking companies Firms who bought in a downturn tend to have off balance. While some shifts are temporary, other things will never be a higher three-year total shareholder return 10 the same: The new normal will be “never normal.” (TSR) than their S&P 500 sector average. By repositioning through M&A, leaders can help outmaneuver uncertainty and drive 30% resilient growth. Analyses of M&A returns coming out of past crises reveals an opportunity: 22% Following crisis-induced downturns, M&A historically has periods of strong performance.10 Suppressed valuations are a partial driver, but opportunities that may not have been tenable in an up-market also may become possible, or new imperatives for growth emerge. For example, Decrease 41% of US online grocery orders were by first-time online buyers in the week of March 9, 2020.11 from M&A during The COVID-19 crisis is unprecedented in the depth and breadth of its global impact. This financial pandemic is not just triggering a major financial shock, it is changing the way governments, shocks businesses and humans interact. Government interventions are at a scale not seen since the Increase Increase 2008 Financial Crisis. The fallout is just beginning. For example, will there be a rise of from M&A from M&A protectionist moves against cross-border deals? Even pre-crisis, regulatory bodies such as during during The Committee on Foreign Investment in the United States (CFIUS) significantly challenged downturns epidemic -11% cross-border tech deals.12 These factors can complicate the ability to act on opportunities. outbreaks Now is the time to thoughtfully put M&A to use. Leaders will move through several M&A M&A in down periods is an horizons, balancing immediate actions to the crisis and plays that reposition for the future. Those who leverage M&A well as part of a holistic response to the crisis over the next 12-24 important mechanism for months will be more likely to outmaneuver uncertainty and outperform those who do not in recovery and growth the next three to seven years. 6 COVID-19: Rebalance for resilience with M&A

Accelerate your pace, expand your scope The Now TheNext The Never Normal Take immediate stock of the Look beyond the immediate horizon Take a broader view of M&A across position the crisis places your to consider how industry structure is the entire ecosystem—and beyond company in and what M&A levers to likely to evolve and implications for industry boundaries—to build for include in your response. M&A, ventures and alliances. resilient growth and reduce risk/exposure to future crises. Make rapid calls on in-flight deals, Determine if industry consolidation is divestitures and new alliances likely, and assess possible Realign partners/alliances to increase required for stability, and revisit as transactions and the ability to resilience, including re-evaluating what needed throughout the crisis. influence them. to own internally versus have in the ecosystem. Evaluate opportunistic plays such Reassess the medium-term M&A as acquisitions of distressed landscape and act on opportunities Continuously revisit priorities and businesses with capabilities you can early to come out of the downturn potential disruptors, and build grow. with the right strategic deals done. analytics/AI capabilities that enhance this capability over time. The duration and focus for each stage will vary greatly by industry and company—depending on how severely each is impacted by COVID-19 and the subsequent economic downturn. 7 COVID-19: Rebalance for resilience with M&A

Position now Forward-thinking leaders will take a holistic approach, makingnecessary Leaders are making Now short-term moves for stability and resilience while keeping opportunistic moves for stability and 14 growth plays on the radar, where possible. opportunistic growth Take immediate stock of the position the crisis places the company in and what M&A levers are A global energy company is needed. This includes reviewing your internal portfolio and ecosystem partners. Quickly identify conducting a portfolio review, critical risk points, including need for liquidity, struggling partners, or gaps in operations. Assess using a private equity lens to the spectrum of M&A, venture and alliance moves that could help alleviate these immediate determine what an activist challenges—including divestitures, alternative/diversification of alliances, consolidation to would do. maintain solvency, and potential hostile takeover defenses. A bulge-bracket private equity Make rapid prioritization calls on M&A activation, including the in-flight deal funnel. Decide what firm is reviewing multiple targets by sector for opportunities to buy should be put on pause, what should be shifted to a different timeline and what should stop. In distressed debt and drive March 2020, companies canceled four times the number of deals compared to the same month restructuring. the year before.13 For new moves such as divestitures, decide if seeking an exclusive arrangement is preferable to an auction. For alliances, define the most critical elements in the ecosystem to An alliance of hospitality groups address, and identify, potentially new, partners most able to solve these needs. created a worker pool to share with a supermarket chain to Evaluate opportunistic plays with long-term potential upside. Start with another look at the support the sudden spike in their investment strategy for in-flight and near-term deals. Evaluate opportunities to place bets on delivery business, offsetting a assets such as insolvent startup IP, talent acquisitions, and distressed tuck-ins. Since the flow of decline in lodging. these opportunities can come fast, having a clear idea of what is on strategy and what is not is A financial services firm is essential. If you are in a strong position, relative to your competition, consider tapping lines of evaluating the opportunity to buy credit or borrowing at low rates to increase available capital for investment. a digital start-up facing liquidity challenges. 8 COVID-19: Rebalance for resilience with M&A

Accelerate out of the downturn next The crisis will continue to unfold and it uniquely defies forecasting. Leaders in a position to Building in agility is key to accelerating out of the downturn. do so are making Next moves16 Look beyond the immediate horizon. Assess how industry structure is likely to evolve and what the implications are for M&A, ventures and alliances. Analyze the potential for A renewables energy firm is acceleration of consolidation, convergence or other major industry shifts. Use this to exploring vertical integration with frame the next wave of M&A responses to rebalance and reposition. distressed suppliers to secure this base. Determine if industry consolidation is likely, and assess possible transactions and the ability to influence them—including leading, selling or defending. For example, players in A global financial services multiple industries are re-evaluating vertical integration out of necessity to shore up company announced a strategic weakened, but critical, suppliers. Consolidation, vertical integration and similar plays are merger just as the outbreak not right for every company but understanding what might transpire and how to react is started and plans to complete essential. it to position for the future. Reshape medium-term M&A agenda and take early action. Begin the necessary pipeline A global consumer products and diligence efforts in readiness for any consolidative activity. Continue to leverage company remains focused M&A for resilience and growth, including divestitures and placing additional strategic on completing planned bets in growth markets and sectors beyond distressed plays. The window of opportunity divestitures and preparing for for these moves can close quickly, and the best returns in M&A often come from deals growth acquisitions that were identified in a downturn.15 strategically correct before the outbreak and remain so. 9 COVID-19: Rebalance for resilience with M&A

In the never normal, readiness determines resilience The COVID-19 pandemic exposed critical weaknesses in almost every Leaders should prepare business. Every crisis creates opportunities to be better prepared for for the Never Normal the future. Take a broader view of M&A across the entire ecosystem to recalibrate for resilient growth. What shape will ventures and alliances in your industry take? Consider how the COVID-19 crisis aftermath will cause industry structures to evolve. Then build the required resilience. Specifically, M&A, ventures and alliances can be used to reshape what is done Does the COVID-19 pandemic internally versus externally, to build a more flexible network of partners, to balance concentration reveal any important needs to risks, and to access new capabilities that will help propel growth coming out of the downturn. partner with a broader Include alliances in your expanded view to realign the company. Re-evaluate alliances and network? ecosystem partners to increase resilience. For example, prior to the pandemic cross-industry Are there non-traditional alliances and mergers were forming to transform the US healthcare model. Similarly, alliances partners that become central in the airline industry have been essential to establishing global networks. Coming out of the to how you will operate with crisis, the roles of such networks will evolve in many industries to solve weaknesses exposed by resilience going forward? the pandemic. Continuously revisit priorities and potential disruptors to reframe the M&A agenda. Each How will these new ventures business cycle brings new and unexpected challenges. Lessons learned from the COVID-19 crisis and refined approaches to M&A will help companies position themselves better to leverage M&A for growth and resilience. Build a help ensure your resilient capability powered by analytics and AI to scan for potential risks and disruptors, conduct scenario growth? planning and identify potential candidates for M&A, ventures and alliances to proactively address any weaknesses. 10 COVID-19: Rebalance for resilience with M&A

Infuse M&A with analytics for readiness and agility The COVID-19 crisis demonstrates that agility is more essential than ever. Analytics capabilities help enable companiesto scan proactively for disruptors and opportunities, make real-time decisions, balance short- and long-term actions, and achieve greater speed to value from M&A in an ongoing, uncertain environment. Deal strategy and diligence Pre close Post close Data-driven and AI enhanced Analytics platform to accelerate Cloud-based accelerators for search and screening one-company operations, prior to systems integration and systems and process integration transformation (e.g., AWS, scaled Analytic industry stress tests environments for SAP and other to model future evolution Organization and culture analytics ERP consolidation) (e.g., consolidated vs. consolidators) to enable better talent and operating outcomes Carve-out factory for divestitures Cyber and technology diligence for Clean-room analytics and AI for Extended use of ecosystem resilience and capability validation synergy planning and realization partners to redefine work through AI and automation 11 COVID-19: Rebalance for resilience with M&A

Rapid response timeline NOW NEXT Within 72 hours Within 1 week Within 2 weeks Within 4 weeks Going forward Get organized Take stock Take action Look beyond Build new M&A Prioritize any burning Depending on impacts Define near-term M&A Incorporate scenario capabilities issues or flare-ups and and company position, agenda in response to the planning into M&A Move to looking beyond any required M&A actions. establish envelope of crisis and convert new agenda to reflect rapidly “Now and Next” priorities immediate M&A focus— funnel of priorities into evolving business as soon as possible to Define parameters for ranging from solvency deal management environment, and build consider additional managing in-flight M&A to positioning for future. pipeline. views of the conditions reshaping of industry (e.g., what to stop, what under which specific and ecosystem plays. to re-sequence, what to Stand-up focused Prepare for iteration deals would be revalue) and revisit as deal/review teams as between M&A for considered (e.g., Build the broader agenda crisis continues to evolve. required to support immediate stability, for valuation, competitor of growth and resilience “Now” activities including opportunistic growth and action, longevity of into the formal M&A portfolio reviews, scans for industry reorganization shut-down). funneland the range of for distressed assets with as the COVID-19 crisis plays M&A considers. upside potential, and plays out. potential defensive Revamp M&A process strategies against hostile and capabilities based takeovers. on lessons learned from the crisisand reshape plans for how it will be leveraged. 12 COVID-19: Rebalance for resilience with M&A

To help our clients navigate both the human and business impact of COVID-19, we’ve created a hub of all of our latest thinking on a variety of topics. Each topic highlights specific actions that can be taken now, what to consider next and how to outmaneuver uncertainty and emerge stronger in the never normal. From leadership essentials to ensuring productivity for your employees and customer service groups to building supply chain resilience and much more, our hub will be constantly updated. Check back regularly for more insights. VISIT OUR HUB HERE 13 COVID-19: Rebalance for resilience with M&A

Contact us NOW NEXT J. Neely Don Dawson Markus Rimner David Mann Takashi Yokotaki Managing Director Managing Director Managing Director Managing Director Managing Director Global Lead, M&A North America Lead, M&A Europe Lead, M&A Asia Lead, M&A Japan Lead, M&A [email protected] [email protected] [email protected] [email protected] [email protected] 14 COVID-19: Rebalance for resilience with M&A

References 1. Cara Lombardo, Coronavirus throws deal making into disarray, The Wall Street Journal, March 31, 2020. 2. Takako Taniguchi, Manuel Baigorri and Lisa Du, Seven & i scraps $22 billion plan for Marathon’s Speedway gas stations, Bloomberg, March 5, 2020. 3. Cara Lombardo, Xerox is ending hostile takeover bid for HP, The Wall Street Journal, March 20, 2020. 4. Liz Hoffman and Eliot Brown, SoftBank backs away from part of planned WeWork bailout, The Wall Street Journal, March 18, 2020. 5. Accenture analysis of CapitalIQ data, 2020. 6. Accenture Research analysis on Central Banks, payment registries and CB Insight data, 2018. 7. Seth Borko, 10 Years later: How the travel industry came back from the financial crisis, Skift, September 14, 2018. 8. Ranjay Gulati, Nitin Nohria and Franz Wohlgezogen, Roaring out of recession, HBR, 2010. 9. Accenture analysis of the world’s 2,000 largest publicly listed companies, data as of February 21 – March 16, 2020. 10.Accenture analysis of CapitalIQ data, 2020. 11. Nathaniel Meyersohn, Coronavirus will change the grocery industry forever, CNN Business, March 19, 2020. 12. MP McQueen, CFIUS annual report shows big jump in investigations, Law.com, November 22, 2019. 13. Accenture analysis of CapitalIQ data, 2020. 14. Accenture analysis, 2020. 15. Accenture analysis of CapitalIQ data, 2020. 16. Accenture analysis, 2020. 15 COVID-19: Rebalance for resilience with M&A

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