It will be fascinating to see how the business world will change and respond in the post-Covid-19 world. The near and long-term impact will likely differ greatly across industries and geographies. With such a large number of firms facing significant revenue, profitability, and liquidity challenges, might this represent an opportunity for acquisitions and industry consolidations?
Let’s answer this question by looking back at M&A activity immediately after the 2007/2008 financial crisis to see if there are any examples to learn from as we contemplate acquisitions in the post-Covid-19 world. The nature of the two crises, and their impact, are certainly different. But there seems to be a similar opportunity for the most fiscally secure firms to make strategic acquisitions at attractive prices.
A fundamental concept of successful M&A activity is the idea of “buying low.” This might mean making an acquisition of a target with declining financial performance. Or it might mean securing a favorable purchase price (a low “multiple”). It can also be liquidity or timing driven, where the acquiring company can potentially find a “deal” due to the target company facing illiquidity or extreme time pressure.
Learning from 2009 M&A Deals
Here are two examples from 2009 including some of the key considerations that might be applicable in the post-Covid-19 world.
Example 1 – Strategic Acquisition of Firm with Strong Post-Crisis Prospects
Intuit acquires Mint.com for $170 million
Intuit (Quickbooks, TurboTax, Quicken (previously)) acquired Mint.com, the three-year old personal finance company in 2009, for $170 million. At the time of acquisition Mint.com had 1 million users. Today, they have over 15 million users.
Deal Motivation: Mint.com was a competitor to Intuit’s Quicken product in the personal finance space, with a strong focus on user experience.
Why buy in 2009? The public markets and housing markets may have been down, but Intuit recognized that Mint.com was positioned to capitalize on two profitable trends. First, coming out of the great recession, consumers would be clamoring for a money-saving and tracking product like Mint.com. Second, the shift towards mobile app usage – where Mint.com’s superior user experience and UX/UI design was a big advantage.
Lessons from the Mint.com Acquisition
With hindsight we can see several reasons why this deal worked. While the larger economy may have been down, Mint.com’s niche / product (personal finance tracking and saving) was conceivably better in difficult economic times, because consumer demand increased.
As we look at potential acquisitions today, are there niches or revenues that are similarly “safe” from broader economic difficulties? Perhaps products that are safer or more conducive to social distancing? Delivery related businesses? Streamed entertainment as opposed to in-person entertainment?
Intuit’s acquisition of Mint.com allowed the firm to leap forward from a product technology standpoint – Mint.com’s user experience, and expertise in UX/UI design. Intuit could have tried to build (versus buy), but this would have taken years to happen, if ever.
Are there areas from a technology or product perspective where you might be able to acquire via acquisition instead of internal research and development? An added bonus, as it was with Intuit, an acquisition can often also mean one less competitor in the market.
Example 2 – Opportunistic Merger of Competitors with large synergies
Stanley Works and Black & Decker announce $4.5 billion transaction in late 2009
Tool companies Stanley Works and Black & Decker agree to combine as a $8.4 billion company, with the deal expected to generate $350 million in cost saving synergies.
By 2009, both large tool companies were experiencing ever-shrinking margins and this long-rumored deal finally was announced (closed in early 2010). Additionally, the global economy coming out of the financial crisis meant that the firms’ customer bases were increasingly wary of making “discretionary” purchases like tools.
The combination ultimately worked well, with significant synergies achieved and the stock price nearly tripling over the next 4 years.
Lessons from the Stanley Works/Black & Decker Merger
The Stanley Works and Black & Decker merger was successful because they were able to find synergies in multiple business functions. A great place to start is looking for potential cost savings by combining workforces. Consider competitors with meaningful G&A expense and look for areas where the combined company might have immediate economies of scale – picking up revenue and potentially lowering G&A as a percent of revenue.
Consider the power of merging instead of battling it out as independents. The post-Covid-19 world might have similar fallout with regard to consumer spending (or hesitancy to do so). While it might have been previously inconceivable, consider if the “new” market dynamics might better support a company of combined competitors.
Related to mergers is the idea of growing, or supplementing revenue, via acquisition. Revenue run rates for many companies will be meaningfully impacted in the near future and the best way to build an economically viable revenue base might be to “acquire” the revenue.
A cautionary note about this example – many M&A transactions rely so heavily on theoretical synergies that any missteps in the actual achievement of these synergies may leave the newly combined company unprofitable. Take great care in the development of synergy targets and ‘sanity check’ the figures. Additionally, highly detailed plans for post-merger integration must be developed to minimize execution risk.
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About the Author
Mitch has over 13 years of finance and systems experience across entertainment, engineering, and technology industries in both private and public companies. As a consultant, Mitch has advised on M&A and capital raise projects, provided post-merger integration services, created budgeting and forecasting models, and performed financial system implementations including NetSuite and Tableau. Prior to 8020 Consulting, Mitch worked at AECOM, Hulu, and Yahoo where he served in both corporate finance and corporate development capacities. Mitch began his career as an investment banker at Wells Fargo Securities, providing investment banking services to middle market clients. Mitch completed his undergraduate work at Claremont McKenna College and earned his MBA from Washington State University.