M&A deal making in uncertain times introduces new considerations

The combination of initial shock that kept businesses’ focus away from big investments and ongoing efforts to contain the virus in different parts of the world has put the brakes on both domestic and international deal-making. 

However, after this phase, the need for companies to divest and restructure their balance sheet will spark opportunities. Companies that made deals during uncertain times may outperform their industry peers – a PwC’s analysis of companies having acquisitions during past recession suggests. 

As companies, private equity firms and other investors start reassessing portfolios and strategies, the appetite to buy will grow as others decide to sell in order to focus on their core businesses. Those in a solid position would consider acquisitions and be nimble to capture the market during the downturn.

Amidst the unfolding disruptions in the global economic scene, results from PwC’s CFO pulse survey conducted in June 2020 suggest there remains a stable MA appetite. 85 per cent of companies responded that they are not changing their M&A strategy as a result of the Covid-19 pandemic.

In the case of Vietnam, given its safe and stable investment environment pre and even during the global pandemic spike, Vietnam is in a position where M&A could be largely anticipated to flourish post Covid-19. 

Observing the current situation, Ong Tiong Hooi, Transaction Services Partner, PwC Vietnam commented that the appetite for M&A activities has not dampened. It is understandable that local companies are now taking the lead as they are based in-country. 

“With Vietnam’s economy on the road to recovery and the anticipated EVFTA taking effect, the next 6 to 12 months would be interesting to watch how the “new normal” unfolds,” added Tiong Hooi.

Under the rippling effects the pandemic on world economy, deal-making for different industries, sectors and geographies have been impacted in varying ways. These factors are expected to change the M&A environment and raise new deal considerations. 

Potential buyers and sellers in this time of uncertainty need to be aware that traditional thinking might not apply in this new normal.

8 factors to pay attention to in uncertain time

The M&A landscape will continue to evolve, and M&A traditional valuation models may no longer deliver. Recovery trajectories are expected to vary significantly across different industries and sectors.

Demand in such markets as cruise lines, movie theatres, bricks and mortar retail, etc suppressed or restricted during outbreakand never recovers to the baseline. Demand for airlines, automotive, casinos and gaming, home furnishings, theme parks, elective surgery, media production, etc. falls during outbreak and slowly recoversto baseline. 

Demand for dentistry, salon/spa services, household appliances, smartphones, clinical trials, live events ticketing, employment agencies, etc. suppressed or restricted during outbreak but laterspikes as a result of pent up or deferred demand. Demand for subscription based services, construction and other contracted services, etc. is locked in for the immediate future withimpacts felt in later periods. 

Demand for grocery staples, personal hygiene and cleaning, packaged foods, at home fitness, home improvement, OTC pharmaceuticals, consumer media, etc. surges in response to outbreak but stabilises atbaseline over time. Demand for video conferencing, telehealth, grocery delivery service, virtual education, streaming services, ecommerce site builders/hosts, cyber security and etc. surges in response to outbreak and sustains growthdue to consumer behavioural changes.

In latest publication "Beyond Covid-19: Deals consideration in a Covid-19 world", PwC Vietnam also explores that any deal consideration should take into account these 8 key areas.

The first key is value drivers. To what extent was the company impactedand have the key drivers that caused adestruction in value now abated to the pointwhere the business can be considered stable?If there was a pick up in activity, is the benefitgoing to be lasting?

The second one is data for decision making. Is the company able to generate the rightlevel of information in a timely fashion inorder to inform decision making? Havescenarios been considered?

The third one is changing market conditions. How has the competitive landscape andrelevant consumer habits changed as a resultof Covid-19? Are these temporary or will theybe sustained?

The fourth one is acceleration of trends. Which industry and societal trends have beenaccelerated as a result of Covid-19 (e.g.working remotely, social distancing, digitalstrategy, shifts in consumer preferences)?

The fifth one is health considerations. How will the longer term impacts of health considerations change the industry? Can thecompany adapt to these?

The sixth one is extent of impact. Will the company be able to weather thestorm and return to pre-Covid-19 levels(unlikely in many cases), or is there a “newnormal” that needs to be considered?

The seventh one is positioned for growth. Is the company able to seize opportunitiesthat will allow it to grow and create valuepost the crisis?

The last key area to consider is government measures. What level of government and industryassistance has been made available (e.g. Ddefer tax payment and land rental deadlineextension under Decree 41)?