M&A In This New Paradigm

The global spread of COVID-19 and the resulting uncertainty on the shape of business as we know it post-COVID-19, has understandably slowed M&A transactions. Global M&A activity was down in the first half of 2020, with deal volume falling 32% in H1 2020 compared to H1 2019.

Although Japan remained relatively strong in Q1 2020 recording USD13 billion across 111 deals largely as Japanese companies continued to conduct domestic deals, the impact was clear in Q2 2020 which recorded the lowest quarterly deal count since Q3 2015.1 Japanese outbound transactions have declined significantly as a result of the uncertainties in global markets and while there is still ongoing volatility globally, outbound M&A is anticipated to recover in the mid-to-long term.

These challenging times have shown that a clear communication strategy is crucial when announcing transactions. Company executives need to clearly explain the rationale for transactions and the implications of deals for employees, customers, shareholders and other key stakeholders, even when conducting domestic transactions. Simply relying on traditional disclosure documents is not going to distill the unease amongst employees, particularly in the target company, as markets move towards a new normal. Communications considerations include:

  • Communicating the rationale for the deal: To ensure a successful transaction, beyond completion, is the imperative for a convincing rationale with a well-conceived communication strategy. What are the goals and how will an M&A deal impact the company’s business model and corporate positioning? Companies must demonstrate both long-term growth and short-term growth potential. Moreover, in an environment when the news cycle is dominated by COVID-19-related issues, leveraging the newsworthiness of a transaction with a solid communications strategy is an ideal opportunity to remind stakeholders of corporate strengths.
  • Employee communications: The COVID-19 pandemic has heightened focus on employee engagement and employee satisfaction. Over the past few months, many companies in Japan and globally have been adapting to remote working and dealing with the very practical and logistical ramifications of COVID-19. The risk of people issues causing integration problems is significant –even outside of a crisis, 75% of mergers fail due to issues related to people, communications and culture. With employees scattered remotely, conveying the rationale and vision for the transaction to employees over different geographies and with diverse backgrounds is even more key to the successful implementation of a deal. Companies must generate and support positive sentiment for the deal by engaging across stakeholders and telling a consistent story.
  • Mitigate political and regulatory risk: With slower regulatory clearance expected in countries impacted by COVID-19 and expanded regulatory scrutiny over the long term, it is important that the company’s communications strategy is clearly aligned with and supportive of its overall legal and economic case.
  • Be prepared for a hostile bid: As many businesses prepare for the longer-term impact of COVID-19 and what this may mean for valuations, companies must prepare for the possibility of increasing bid activity. Activist shareholders may use low valuations to increase or extend their positions and may also seek to disrupt publicly announced transactions or agitate for an M&A transaction in this uncertain environment. As activists become increasingly involved in transaction events, management boards, investors relations and communications departments need to ensure activist strategies are anticipated in their transaction communications plans.
  • The virtual team: As countries slowly adapt to the many challenges posed by COVID-19, cross-border deal-making in this environment has gone increasingly virtual from planning to implementation. With limited business travel and cross-border movement, the importance of a joined-up team with experience working together in cross-border situations, across multiple languages and time-zones cannot be stressed enough.  Key factors for successful announcements include detailed planning, creative ways to use visual content such as videos, microsites, and the digitalisation of media engagement and briefings. We anticipate some form of virtual communication is likely to be a permanent feature of deal communications.

 

For more information about Finsbury, please contact finsbury-japan@finsbury.com

 

1 Data from Mergermarket Global and Regional M&A report Q1 2020 and Mergermarket Global and Regional M&A during 1H2020