How much dry powder is there in the global M&A sphere?

With political uncertainty including the Brexit negotiations and the Trump presidency dominating 2018 and 2019, the sudden halt in trading in many businesses during 2020 could have shattered any remaining confidence in multiple economic sectors.

However, investors and businesses are showing resilience and entrepreneurial spirit to take advantage of opportunities as assets come up for sale, while also pro-actively seeking targets that can help speed up growth (or re-growth).

Globally, there have been bold and decisive moves in the M&A sphere. Experienced advisers based in the offshore finance centres have been in a position to observe recent trends and are ready to act as the market continues to show signs of steady growth during the COVID-19 pandemic.

Buy/sell

Initially, some M&A deals were put on hold, with others falling away completely, as buyers were seeking substantial discounts and sellers were reluctant to move away from pre-COVID valuations. But in the second half of 2020 pricing started moving to the middle and more deals were done.

Traditional sectors including real estate and infrastructure continue to attract attention in the immediate aftermath of the first year of the COVID pandemic. For obvious reasons, real estate assets connected to warehousing and distribution have been particularly attractive, as have supermarket sites.

High street retailers, hospitality and entertainment venues have perhaps been the most visible examples of struggling sectors where noticeable changes will be seen post-COVID. However, the acquisition of the Top Shop and Miss Selfridge brands by online retailer ASOS proves that big name brands even in troubled sectors can survive the pandemic.

Certain sectors under the technology umbrella have been growing at exponential rates. The COVID pandemic has only accelerated companies' plans to improve and expand their offering to customers, generally through the use of digitisation and with a focus on the environment and sustainability. Businesses will be looking at tech-enabled competitors as a route to 'build back better'. The e-commerce and internet gambling industries were popular targets in 2020, with Mourant advising on a number of these deals over the course of the year.

Well priced and targeted credit opportunities have been leading to growing levels of interest in financing M&A transactions with global investors eyeing up potential deals as they look to vary their revenue streams.

While most deals have been in the private M&A space, Mourant assisted on the largest Initial Public Offering on the London Stock Exchange in 2020.

What now?

In the early days of the pandemic, especially in the US and the UK, there were a number of issues revolving around bidders trying to walk away from deals to acquire trading assets. This may well shape M&A deals in the short term, but material adverse changes remain difficult to rely on as a walk away right. If they are to be used, they will need to be specifically tailored to reflect the buyer's concern. In turn, this may lead to an increased focus on pre-closing conditions.

There has definitely been a move towards longer deal timetables, with buyers focusing on more cautious due diligence, especially around key supply lines, service providers, business interruption procedures etc., and taking longer to consider the implications. Clients wanting more bespoke arrangements on both the buying and selling side of the deal have only contributed to this trend.

Predictions for the post-COVID era include suggestions of heightened interest in doing deals featuring distressed assets, as a result of enforced periods of business shutdowns for many. This uptick in distressed asset sales as a result of the pandemic has not yet materialised, probably due to government furlough support and the moratorium on repossession of leased property. It is still expected that this will occur at some time, when these support measures have been withdrawn. 

Nevertheless, certain deal features that historically might have been associated more with distressed asset sales are becoming commonplace. A move away from seller friendly terms has already been witnessed in some deal negotiations. Buyers will now often seek the security of some form of retention account or deferred consideration, to bolster the enforcement of seller warranties (whether or not the buyer is worried about the credit worthiness of the seller post completion) and also where there is uncertainty over client and value retention post-sale. This has led to an increased move away from locked box deals, and towards more stringently regulated completions.

Of course, where distressed assets are being sold by an insolvency practitioner, the usual rules of very limited warranties (if any) and no recourse will apply.

While buying a distressed asset undoubtedly comes with some inherent risks, it is not only the buyer who will be more cautious post COVID. Lenders too may require more substantial due diligence, and be wary of any pressure to move too quickly to snap up assets as they come available.

On the other hand, the purchase of any distressed asset often comes with a need to act quickly before value dissipates further or customers lose interest. This creates a conundrum of balancing enhanced due diligence against time pressures. It is possible too that price adjustments might be used to re-allocate risk where it is imperative to speed the process up.

So, going forward, there is likely to be an increasing challenge to find the appropriate balance between transaction speed and appropriate levels of due diligence, which will no doubt be determined by the complexity of the relevant business, the relative bargaining strengths of the parties and the level of bidder interest in the asset.

Why Guernsey?

Guernsey's successful response to the first wave of the pandemic enabled the expertise within the island to be shared with investors and companies around the world uninterrupted, albeit remotely. This demonstrated the strength of another trend which will continue in the long term under the "next normal".

Guernsey has a hard-won and well-deserved reputation for stability, resilience and sound regulation while embracing innovation and being flexible as challenges emerge, with a pool of knowledgeable professionals ready to service international clients. The island therefore remains an excellent choice of domicile for bidder acquisition vehicles, topcos in corporate restructures and other asset holding vehicles. Coupled with the many existing Guernsey companies within global multi-nationals, this means that Guernsey will continue to be involved in global M&A transactions.

The island's rich and wide-ranging fiduciary heritage, and its record of successful entrepreneurship, has resulted in local financial services businesses being a key focus of M&A activity over a significant period of time. While a global health pandemic may seem a risky time to be investing, those investors looking to take a more cautious approach to M&A deals are likely to be attracted to assets that have held out well in previous financial crises, and yet retained buyer interest even when economic circumstances improve.

M&A deals such as these continue to generate significant interest, with Guernsey based advisors seeing activity within this sector at least consistent with pre-pandemic levels. This adds to the overall reputation of the offshore finance jurisdictions as a stable and reliable place to do business. Despite global uncertainty, 2020 continued the trend of consolidation of local corporate service providers, fund administrators and financial services businesses, by both existing players and newcomers, and investment into insurance and reinsurance companies. Increased consolidation plans involving private equity firms and trade buyers along with the increasing possibility of management buy outs are all regular features now and that is likely to continue.

In the same vein, the Guernsey M&A market did not see any notable increase in distressed sales during the first and second waves of the pandemic, with the market holding steady during 2020 and remaining a popular asset class.

2021 and beyond

Hopes that activity levels within the M&A sphere will continue have already materialised with plenty of movement in the non-distressed sphere over 2020 and early 2021, and an expectation of an increase in the number of distressed sales going forward.

This will undoubtedly be a crucial economic sector going forward and differing deadlines for loan repayments in various jurisdictions could dictate when opportunities arise to explore M&A deals.

With a lot of 'dry powder' available during 2021, as the unallocated capital from 2020 is utilised, the appetite for risk may fluctuate with bravery needed to take advantage of deals as they materialise.