Mergers and acquisitions in the time of Covid19 are not easy.
Some companies which were worth five times more had plummeted in value within 45 days or so.
How could this have happened?
Due diligence by investors wasn’t made properly.
Investment or buy out?
Covid19 has created a buyer’s market, which has companies by the throat.
Whether it be startups looking for growth capital or mature companies looking to survive the next sales-cycle, it all is dependent on the savvy investor.
The knight in the shiny armour to save the day.
But, what should investors be looking at when deciding if they should invest or acquire?
Water it so it may grow
During uncertainty such as Covid19, an investor should be hedging his/her risks properly to be able to retain enough leverage for future dealings.
It is never a bed of roses on a regular day for venture capital, and it is most certainly not a bed of roses at this time either.
Mergers and acquisitions in the time of Covid19
When investors look at companies to acquire and/or merge their companies with, they look at the same data as when deliberating about investing in a startup.
They look at:
- The senior team
- The financial reports
- The sustainability of the company
Not every acquisition should be treated the same; same goes for mergers.
“If the senior team is weak”, as Tom Nault, managing partner at MiddleRock Partners shared, “it might be a good idea to acquire the company wholly and kick out the senior managers (like some do)” (sic).
If the team in charge is strong however, it would be wiser to even go for a merger.
Making some of the original senior team members partners and/or executives at the new team and only then decide who should continue running it.
That could be the difference between a successful merger and one that would break up soon enough.
This has been done for years on end, to ensure that both the stakeholders as well as the board may work with the right people at the newly merged firm.
Sometimes, parts of the company are even worth more than the entirety of the company.
That is when a “raid” of the company and overall selling of the company piece by piece may become more profitable (e.g. Motorola Mobility).
When looking at the financial reports, an investor should delve at:
- Stock value over time
- Operational profit (or loss)
The company’s overall revenue should make sense in comparison with its valuation.
If the company only made $50MM last year and is worth over $500MM, something definitely should be taken under the magnifying glass.
Same goes for the company’s stock value.
An investor should be taking a look at the stock over time.
If there wasn’t a major tumble in the entire index, the stock shouldn’t be free-falling for cycles on end (if it is, that is).
The operational profit (or loss) is also relevant.
High revenue for very little operational profit (or loss altogether), would also make an investor squint to try and see what’s really going on in there.
The single most important aspect in which an investor should look when evaluating a company for an acquisition, merger or even fundraising is its sustainability.
Would the investor actually lose money if he/she takes this deal or would he/she gain money?
Is the product even relevant for the next 5–10 years?
Would it be relevant in a black swan event, like Covid19?
These are questions that should be addressed and answered ASAP.
If something makes no sense, the investor should WALK AWAY from the deal.*