Microsoft is strengthening its gaming division with the Xbox game console with a multi-billion dollar purchase. Something like that has become rather the exception in times of crisis – although takeovers can be successful right now.
Microsoft is strengthening its gaming division with the Xbox game console with a multi-billion dollar purchase. The US software giant is taking over Zenimax Media. Such cases have become the exception in times of crisis. Mergers and acquisitions are taking a back seat to companies. The cause: Many are struggling with billions in sales losses, cannot pay their employees and live in uncertainty about how the next few months will develop.
“The M&A market has to accept major losses,” says Christian Futterlieb, managing director of the private equity firm VR Equitypartner. Potential buyers and sellers would find it difficult to agree on a price because the gap between future prognoses is too wide. Only when the economic development is seen uniformly again, according to Futterlieb’s estimation, transactions can increase. At VR Equitypartner alone, investments have fallen by around half. But Futterlieb is confident: Since September, the number of participation requests has increased significantly – and with it the probability of deals.
Insolvency administrators have their hands full
Nevertheless, the uncertainty will persist for the next six months, confirms Georg Bitter, professor at the Center for Insolvency and Reorganization at the University of Mannheim. To what extent depends on the industry: “There are business models that are only unsustainable because of the crisis,” he says. The aviation industry in particular is struggling to survive. That is why, for example, the airline Lufthansa received billions in subsidies from the federal government in silent contributions. That may help in the short term. But by 1 January at the latest, when the obligation to file for insolvency returns in the event of indebtedness, Lufthansa – and most other airlines – can hardly be saved without further measures, says Bitter. A lot still needs to be done in order to be able to confirm a positive going concern forecast for the company at the beginning of 2021.
But not only in this industry insolvency administrators and consultants have their hands full: the automotive industry was struggling with a downward pull even before the crisis – which has now become even more acute. And gastronomy, tourism and organizers are also among the greatest victims of the pandemic. Many of the zombie companies will have to go into bankruptcy by October 1st, when the old bankruptcy rules will apply again.
For financially strong and growth-oriented companies, this is an opportunity. Because Bitter recommends buying a company only after bankruptcy proceedings have opened: Nobody should buy a company with a high debt burden. Therefore, the takeover could better be done through the insolvency administrator, since he only sells the active components and thus the liabilities do not have to be taken over. Buying before bankruptcy is only recommended if a company is fundamentally well positioned, but is in a crisis stage due to the current situation. Sectors that deal with construction, IT, infrastructure, pharmaceuticals, logistics or food usually find a buyer, as attorney Michael Wiehl, who heads the international M&A practice group of Rödl & Partner, confirms. In a crisis there are always winners and losers. “When companies go bankrupt, the market is cleaned up,” says Wiehl.
Crises offer opportunities in the M&A market
According to Bitter, the M&A market for insolvent companies can be compared to a flea market: insolvency administrators would like to sell the company as quickly as possible. The company acquisition is normally completed within three months. So fast that uncertainties remain. But where there are risks, there are also opportunities: “Some companies can be bought for less than their value,” says the university professor. But potential buyers shouldn’t hesitate too long when taking over: Otherwise, according to the expert, the best employees could run away – and switch to the competition. The managing director of the M&A consultancy Everto Consulting, Thomas Salzmann, has already seen such cases several times.
Buying cheaply is not enough
Nevertheless, the buyer must not rush a transaction, as Salzmann confirms. Because this can only succeed if a relationship with the seller is established. A transaction model has three phases: the analysis, transaction and integration. The basic problem: Many would skip the first step and thus have no idea whether the culture of the company they bought fits their own. For example, one company attaches great importance to project work and in the other the boss decides how the employees should proceed. When the two corporate cultures meet, the employees cannot manage the simplest projects because they are not used to teamwork. According to the managing director of Everto-Consulting, almost half of the potential buyers fail in the first phase – and another 30 percent in the other two.
The pandemic also brings benefits for company acquisitions. Falling prices and fewer competitors can represent an opportunity. But not everyone notices it: “In a crisis situation, certain and sometimes specialized groups of investors often benefit,” says Andreas Stöcklin, Germany boss of Duff & Phelps, one of the world’s largest consulting firms. According to Stöcklin, on the one hand these are financial investors who concentrate particularly on taking over companies in a crisis, the turnaround investors. On the other hand, this includes corporations that have high levels of liquid funds and want to expand in certain markets. But there are also strategists who want to save critical value chains, such as those on the supply side, in order not to jeopardize their own business.
Use Corona aid to buy a company
In contrast to many other European countries, the M&A market in Germany is less affected by the crisis. Often the company acquisitions are financed with the help of outside capital – particularly with private equity investors. However, according to Wiehl, banks have become more cautious when it comes to external financing as a result of the crisis. Therefore, strategic investors who have a lot of equity currently have a clear advantage. But there are also alternatives, such as a KfW loan. The Kreditanstalt für Wiederaufbau enables lending to be granted on favorable terms. “Experienced people are now taking advantage of the situation,” says M&A advisor Salzmann. There is the special situation that prosperous companies take up corona aid and thus make company acquisitions. Everto Consulting also has such customers themselves.
The magic recipe for success
For the company acquisition to be a success, various factors must be met. “The management of the investments is the be-all and end-all,” says Futterlieb. VR Equitypartner would not get involved in a company where the product is convincing but not the person at the top. Because: According to the managing director, successful transactions only work with managers who pull together with the shareholders. In addition, the business model of the target company must be understood, adds Wiehl. The manager should understand where there are issues that need to be resolved in order for the company to become more successful again.
But enough money is also an important factor in order to be successful. Almost half of the company acquisitions would not produce the results that buyers originally expected. According to Wiehl, many of them fail because they have given too little thought to the integration into the new corporate culture. Stöcklin emphasizes that M&A is often a central component of the successful growth strategy: “Access to important new markets or key technologies through targeted company acquisitions is a growth accelerator”. Duff & Phelps has managed to take over and integrate more than 30 companies within 15 years.
The prognosis is therefore: After the crisis there will be a boom in the M&A market. “Many projects have built up that will lead to more transactions after the pandemic,” confirms Futterlieb. Salzmann is also optimistic: Companies with a stable business model in particular should recognize that they can grow better through acquisitions. The current interest rate situation offers above-average company growth. But the distressed M&A market, i.e. the market for companies in crisis, is also increasing, according to Bitter. As soon as the obligation to file for insolvency applies again.
More on the subject: Should the ARM takeover be approved, the Nvidia boss would be one step closer to his vision. Competitor Intel has long been left behind.