M&A in Unprecedented Times

Rob Owen, Will Sammons, Mark Geday, Robert D. Goldbaum

A collaboration between Alpha FMC and Morgan Lewis

Governments around the world are taking unprecedented emergency peacetime measures as a result of the coronavirus (COVID-19) pandemic. Whether bullish or bearish, the effect on mergers and acquisitions (M&A) is likely to be profound.

The start of 2020 saw record highs at the peak of the longest bull market in history, shortly followed by the worst single day declines since Black Monday. The spread of COVID-19 saw indices wash about 35% off their value in March alone, with only a modest recovery in April, still 20% below previous highs.

It’s not all bad news—this sudden downturn may allow businesses to make acquisitions at relatively low valuations with flexible solutions to satisfy changing shareholder demands. This may create opportunities for acquisitions at relative discounts to “normal” market prices, accelerating growth, AuM, and creating significant long-term shareholder value.

[1] IMAA analysis, 2 April 2020, M&A Banking; Company Annual Reports, 2018-2019; and Yahoo Finance, May 2020

Some asset management firms are in a pinch. Naturally, the deterioration of financial markets and investor confidence reduce overall value of investments but also increase outflows. COVID-19 saw European asset managers lose €37.5 billion (£32.9 billion), representing the highest outflows since the global financial crisis. Managers reported redemptions equal to 3.1% of AuM, slashing fee revenue and dwindling cash reserves. [2]


Opportunity of a Generation

For companies with a robust balance sheet, current market conditions could be the opportunity of a generation as the pre-pandemic drives of M&A still remain, and may be accelerated.

Regulatory and pricing pressures in addition to generational change remain ‘front and centre’ for the reasons to undertake M&A. The relatively high premiums previously seen in the market have been to some extent abated. Significant volumes of restructurings and distressed deals may arise as asset managers looking for cash are required to dispose of attractive assets and readjust their strategic focus. Market trends that we expect to see continue or accelerate include the following:

  • Greater consolidation, both vertical and horizontal, in part due to the continued tightening of the regulatory environment
  • Significant volumes of restructurings and distressed M&A
  • A focus on ESG, including targeted acquisitions to increase ESG skills sets
  • Increased demand for actively managed funds, which have been able to respond to the pandemic and demonstrated performance, in a market where passive funds may not perform as strong as previously
  • Increasing pressure on pricing and more complex buyer protections
  • Accelerated general shift as the crisis brings forward exits after difficult times, and
  • Disposal of attractive assets to raise cash and readjust strategic focus

While sellers clearly would not be looking to “sell at the bottom”,  the instability and uncertainty created by outflows, and the associated loss of revenue, mean that boutique managers may look for a “flight to safety” of their own, with founders motivated to consider reduced purchase price multiples.

Companies in distress need to consider the type of organisation they could partner with, taking into account:

  • How to best present their business plan to ensure maximum value, and
  • The characteristics of an organisation that would be desirable, including the identification of any red lines

Sellers must seek a way to look attractive to a buyer in the current environment, creating realistic yet promising business plans, stripping any fat, as well as understanding the concept and approach they will take to bid defence.

Negotiating the Deal

The COVID-19 pandemic has had a significant impact on the negotiation of M&A transactions and the treatment of traditional provisions and issues. Buyers should pay particular attention to the following:

  • Allocation of pandemic-related risks and uncertainty
  • Material adverse effect clauses and other termination rights—in particular carve outs for “general economic” and “market” conditions and similar previously customary exclusions
  • Whether client consent-related purchase price adjustments and closing conditions are measured on a market neutral basis, as is customary, or instead should be measured inclusive of changes in markets
  • The need for clear conduct of business rules prior to closing and clear limits on any exceptions thereto
  • Accounting for Q1/2 business interruptions in price adjustment mechanisms and protections such as deferred consideration and earn outs
  • A readjustment in the balance of equity versus debt financing as lending requirements become stricter
  • Managing the practical considerations of site visits and management presentations—or potentially doing deals with key target personnel who have only been “met” by buyer virtually
  • Extended timetables for regulatory approvals, and
  • The carve out of COVID-19-related risks from warranty and indemnity related insurance

How Alpha can help

Alpha is a leading the global asset and wealth management consultancy with offices in 12 major financial centres. Boasting more than 400 consultants around the globe and a client base including 80% of the world’s largest asset managers, Alpha helps asset and wealth managers think smarter and shape their business for the future. When client demands become more complicated, we help asset and wealth managers work more effectively.

Solutions Due Diligence: Alpha’s knowledge of the industry allows us to deliver a holistic approach which is tailored to each deal. Alpha takes relevant parts from each pre-deal due diligence (e.g. operations, IT, and divesture diligence) and creates a bespoke, comprehensive solution for a given situation. Involving industry subject matter experts throughout the process allows for more accurate future cost-base forecasts and a more in-depth analysis of potential opportunities to enhance a target’s business.

Commercial: What is the client’s broader strategy? Will a potential acquisition ‘fit’ the strategy?

Operations: Is the target business organised in the most efficient manner?

Synergies: How can the most value be derived from the combined business?

IT: Does the target use IT efficiently to enhance client experience and streamline the business?

Divestiture: Is the planned divestiture well-understood and costed?

Planning and Delivering Integration Success: Alpha is experienced in planning and delivering large-scale integration programmes. From defining the target state, moving suppliers, or creating best-in-class platform functionality, Alpha can help plan for success and deliver it.

How Morgan Lewis can help

Morgan Lewis has one of the leading investment management transactions practices in the world, with eight partners focused primarily on domestic and international asset and wealth management transactions, and more than 150 investment management regulatory and fund formation lawyers supporting transactions practice across 31 global offices in North America, Europe, and Asia.

Our partners regularly represent a wide variety of industry leaders in the full range of investment management transactions. Our experience includes numerous acquisitions and sales of investment managers, minority investments in traditional and alternative asset and wealth management firms, spin-outs and lift-outs of investment management businesses and teams from larger organisations, and capital market and credit transactions involving investment management firms.

We have particular experience with respect to majority-minority ownership structures, operating autonomy governance arrangements, strategic minority investments in alternatives firms and the institutionalisation of boutique managers, and the complex structural, financial, tax, and regulatory considerations these types of transactions can present. Through our extensive and diverse background in these areas representing acquirers, sellers, management teams, and investment management firms, we are familiar with the perspectives of the various transaction participants and are therefore highly efficient and effective in resolving the issues that are most significant to each of them.

Your M&A counsel should do more than just document a transaction and orchestrate due diligence. At Morgan Lewis, we have the commercial perspective and experience to add value from initial term sheet negotiations through transaction completion, helping to balance competing considerations and successfully structure and execute investment management transactions in these turbulent times.

About the Authors

Rob Owen
Associate Director, Alpha FMC

Rob works exclusively on transaction-related projects, specialising in identifying value creation opportunities. He often works on transactions which will result in a significant change to the ongoing business, either as a result of an integration and delivery of operational synergies or as part of a divestiture and carve out.

Will Sammons
Associate Director, Alpha FMC

Will focuses on supporting clients throughout the various stages of pre-deal due diligence working with them to develop their overall strategy, identify potential targets, assess the strategic fit, and plan for a successful integration. He works closely with global clients to help define their long-term strategic vision and execute on various organic and inorganic transformation initiatives to successfully achieve that vision

Mark Geday
Partner, Morgan Lewis

Mark has more than 20 years of experience employing a range of innovative and market-defining transactions, including complex private and public matters involving parties with differing needs and goals. He advises on myriad aspects of company law including M&A, disposals, restructurings, joint ventures, fundraisings, and strategic stakes.

Robert D. Goldbaum
Partner, Morgan Lewis

Rob, co-leader of the investment management transactions practice, regularly advises a wide variety of industry leaders in the full range of asset and wealth management transactions, including M&A, strategic minority investments, sales, spin-outs and lift-outs, capital markets transactions, and “seed & stake” arrangements.