Playing Offense Against COVID

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It was going to be another robust year for mergers and acquisitions, with the business pages full of rumors of multibillion-dollar deals, spurred on by big firms looking for small, struggling fish that would be relatively inexpensive to buy and combine. One analyst report, in fact, predicted a strong year of activity “driven by companies looking to strengthen their business.”

Which is exactly what appears to be happening. Only…

The big “only” here, of course, is the global pandemic. At first, with industries coming to a virtual halt in the spring, nearly every megafirm and private-equity outfit had no choice but to pull back from all the dealmaking they planned and take stock of their cash. But M&A headlines are returning briskly these days, with firms like Goldman Sachs, Uber, and (no surprise) Amazon announcing or rumored to be considering some opportunistic plays to bulk up. “There’s activity happening,” says David King, Higdon Associate Professor of Management at Florida State University’s College of Business. “Companies that are capitalized are out looking to pick off assets.”

M&A activity has always been a major lifeblood of business. So its disappearing act earlier this year was one of many indicators of how stunned business leaders were in COVID-19’s path of financial destruction. In the first quarter, deal volume sank to $690 billion, a 35 percent drop from the same period last year and the lowest first quarter in more than five years. To put that in perspective, the value of global M&A deals has surpassed $3 trillion annually for the last six years, with 2019 ranking as the fourth largest year on record for global M&A activity.

Now, as many experts see it, the business world has little choice but to consider dealmaking. So many have tried layoffs, salary cuts, and closing factories without any bottom-line improvement. That leaves needing stronger partners, in some cases for survival. Meanwhile, a host of megafirms, particularly in tech, stored billions of dollars in cash and were already looking for opportunities before the pandemic struck. “Mergers may be a way out of the financial stress for some,” says Rory Singleton, a senior client partner in Korn Ferry’s Global Industrial Markets practice.

But finalizing the deals—which hasn’t happened for many of the bigger ones so far—and making them work are two different challenges, especially in a pandemic. Stephen Bainbridge, a UCLA law professor who specializes in M&A, says leaders are often overly optimistic about their ability to turn around businesses in deep trouble—and end up creating more financial problems than solving them. “Merging a failing company into a healthy one could get the healthy company in trouble,” says Bainbridge. “It could end up being dragged down.”

Apart from financial concerns, joining any two companies together often requires merging two entirely different cultures. Experts say that requires getting everyone to agree on what a good outcome looks like, then establishing common norms and values. It’s a unique challenge for leaders even in normal times. During a pandemic, it could be even harder.

Or, as Bainbridge says, “Successful mergers depend on the ability to build a new team and integrate cultures in a way that gets buy-in from everyone as quickly as possible, and that’s going to be incredibly hard to do over Zoom.”