Musings from M&A

It’s always interesting times as a due diligence practitioner; we get to analyse and assimilate data from a new business or target every week.  And the data we receive comes in all different formats and everyone’s business is nuanced.  

The last few years have, however, thrown up some interesting challenges:  

• How to treat Covid related grants and costs when assessing underlying earnings?
• How to work as teams, under time pressure to deliver quality outputs, when working remotely from each other, our clients and target management teams;
• And most recently, how to diligence the uncertainty faced by management teams caused by the unprecedented, at least in my career, turmoil resulting from in part the war in Ukraine and the response of the financial markets to the mini-budget.

We’ve witnessed management teams having to deal with major supply chain challenges, energy cost uncertainty, general wage and cost inflation, together with the Bank of England’s actions leading to rising interest rates and currency deflation.  The latest Deloitte CFO Survey (the survey) reflected on many of these key topics, with “corporates facing a major reset” over the coming months and CFO’s viewing credit as being more costly than at any time since 2010.  The survey found that “almost a third of CFOs reported significant or severe supply chain disruption in the third quarter” and that increased energy prices and disruption due to energy supplies is predicted to pose the greatest risk to business.  This led to “CFOs attach[ing] a 78% probability of the UK falling into a recession” on average.

I have real sympathy for finance teams trying to navigate through these effects and prepare a set of forecasts for us to diligence.  I often say to my team, stand in the shoes of management, but right now that feels like a challenging place to be.  So, hats off to those finance folks who are helping to steer the ship in these waters - the best ones I’ve experienced are taking advice, acting to shut down as many variables as possible, and working through scenarios to stress test their business.  

Resoundingly, management are prioritising more defensive strategies such as cost control to help deliver their firms though this period of instability.  Yet, despite the obvious headwinds, 14% of the surveyed group still regarded expansion through acquisition as a priority, with due diligence to play a key role.  

As one banker said to me recently: “We all know one thing, the forecasts will be wrong.”  That wasn’t a criticism, just a reflection of reality.  And, as long as diligence providers, bidders, lenders and everyone else involved in M&A keeps this in mind, we will continue to see deals being done and management teams being able to focus on what’s most important: steering the ship.