Your Appetite for M&A Risk Has Changed. Should Your Process Change Too?
Alex Ney
The pandemic has made M&A buyers more cautious when it comes to evaluating risk
Alex Ney has been deeply involved in dealmaking over the past year-plus, during which the M&A landscape was sideswiped by the pandemic before rising to new peaks. Amid the turmoil, risk-taking among buyers has changed, Ney says.
Q: Big picture, what does the M&A market look like right now?
Deal activity has recovered from the pandemic low points of last spring—that probably started happening last fall. Early 2021 first-quarter activity was quite strong. Part of that just stems from a lot of dry powder out there; part of it is buyers trying to make investments that could pay off big in a post-COVID landscape.
That said, there are some big changes to the M&A landscape. Deal volume and an overall desire to invest is similar to what they were pre-pandemic. But the risk calculus has gotten a bit more complicated for buyers.
Q: Can you give an example?
I do a lot of work in healthcare, which obviously has been disrupted as much as any industry. A lot of talk has centered on telehealth, a change that will have long-term effects and could end up benefitting patients.
What isn’t talked about as much is how non-emergency treatment organizations—like physical therapists—have been affected. Obviously, you can’t provide that kind of treatment over Zoom, so those organizations must closely watch guidance from local health departments about reopening and operating.
Further complicating things is that one practice group might have locations across jurisdictions—e.g., operating in Los Angeles County is a lot different than operating in San Diego County. If you’re looking to buy a practice like that, you need to consider jurisdictional differences—something that wouldn’t really have been part of the equation in February 2020.
Q: How are things like evaluations and risk analyses being affected?
Many companies looking to be acquired are eager to push out their evaluation windows. Every time the calendar flips to a new month, the doldrums of spring 2020 look more like anomalies or, at least, distant memories.
For buyers, the appetite for risk is lower. Private equity firms have a well-earned reputation for targeting promising but inefficient companies in hopes of making them more efficient of turning a big profit, and that approach isn’t going away. But private equity firms seem less likely to take big swings, or they’re more cautious when they take them, because any deal in this environment is inherently riskier than it would have been 18 months ago. As a result, due diligence is more important.
Q: What’s the best advice you can give about risk-taking and due diligence in this environment?
Adapt your standard processes and workflows to the current environment—and stick with them. Many targets and players in today’s M&A world consider their situations unique, which may only be amplified by COVID-19. The ability to evaluate potential targets on a level field is key for identifying optimal investments.
While it is inherently impossible to compare two investments through the same lens, it’s important to develop processes that deliver a consistent and concise work product to assist in making the most informed decisions.
Q: Given all of these factors, are there some constants when it comes to smart dealmaking?
Some advice is fairly timeless. Before starting on the path toward a deal, establish clear end goals and revisit them throughout the process. Effective management of deal teams also is crucial.
Each client and team will have different personalities and motivations. Transparency and two-way conversations are crucial. This extends to defining roles and responsibilities, establishing deadlines and expectations and holding each other accountable to the plan and end goals. Additionally, fostering an environment in which speaking up is expected and encouraged streamlines workflows and allows for resolving deal issues in real time.
Q: Given how quickly things have changed over the past year-plus, how can buyers and deal teams stay fluid and adaptable?
A big part of it is embracing feedback, which is a vehicle of improvement. It goes both up and down individual teams and between consultants and clients and should be delivered and considered throughout the process. Embracing open lines of feedback is the best way to learn for the next deal or engagement.
One misconception is that feedback should be solicited and considered after a transaction is complete. But if you ever think, “There has got to be a better way to do this”—even if you’re midway through a deal—there probably is. It’s at those inflection points when rethinking things is most important, especially when so much around us is changing.