Deals that came out of the 2008 financial crisis may provide clues to post-Covid M&A
It will be fascinating to see how business will change and respond in the post Covid-19 world. While the nearand lo ng-term impacts will likely differ greatly across industries and geographies, a large number of firms are facing significant revenue, profitability, and liquidity challenges. Might this represent an opportunity for acquisitions and industry consolidations?
A look back at the M&A activity immediately after the 2007-2008 financial crisis provides examples to learn from as we contemplate acquisitions in the post Covid-19 world. The nature of these crises and their impact are certainly different. But both give rise to similar opportunities for fiscally secure firms to make strategic acquisitions at attractive prices, whether through acquiring a target with declining financial performance, securing a low multiple, or taking advantage of opportunities fueled by liquidity pressures or timing challenges. Two M&A deals from 2009 offer lessons learned and key considerations for the current market.
A strategic acquisition with strong post-crisis prospects
Intuit (famous for its QuickBooks and TurboTax accounting software) acquired Mint.com, the three-year old personal finance company, for $170 million in 2009. At the time, Mint.com had 1 million users. Today, it boasts over 15 million users.
The motivation for the deal was the fact that Mint.com was a competitor to Intuit’s then Quicken product in the personal finance space, with a strong focus on user experience. Though the public markets and housing markets were down at the time, Intuit recognized that Mint.com was positioned to capitalize on two profitable trends: Coming out of the Great Recession, consumers would be clamoring for a money-saving and personal finance tracking product, and the software market was seeing a 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
While the economy overall was down, Mint.com’s niche (personal finance tracking and saving) was conceivably stronger in difficult economic times, increasing consumer demand for these tools.
The 2009 Mint.com acquisition suggests two key considerations when weighing acquisition opportunities in the current M&A market.
1. Are there niches or revenues that are similarly safe from broader economic difficulties? Perhaps products that are safer or more conducive to social distancing that will provide a competitive advantage going forward. Several types of businesses might include:
- Delivery businesses: companies that do not rely on in-person or on-premise interactions.
- Streaming or virtual entertainment: content consumable from a couch as opposed to in-person at a large venue.
- Remote services: while pre-Covid there remained some objection to having third-party providers that weren’t “local” (think marketing firms or certain consultants), in a post-covid environment there is likely going to be a weakening of this desire to meet face to face.
- Software: specifically productivity software, from ERPs and CRMs to project management tools and virtual communication tools. These types of companies were already gaining significant traction over the last decade, and the Covid situation should only accelerate business’ interest in the broad range of productivity software.
2. Intuit’s acquisition of Mint.com allowed it to leap forward from a product technology standpoint by leveraging Mint.com’s user experience and expertise in UX/UI design – something that would have taken years (or may not have happened at all) if Intuit instead chose to build the same technology. Are there opportunities for fiscally secure companies to build out their technology or product offering more effectively by acquiring it rather than investing in internal research and development? Doing so can not only accelerate time to market, but also remove a competitor from the market.
An opportunistic merger of competitors
In 2009, tool companies Stanley Works and Black & Decker agreed to combine as an $8.4 billion company in a $4.5 billion deal expected to generate $350 million in cost saving synergies.
At the time, both companies were experiencing ever-shrinking margins. With the global economy in the very early stages of emerging from the financial crisis, their customers were wary of purchasing discretionary items like tools. Yet the combination ultimately worked well, with significant synergies achieved and the stock price nearly tripling over the next four years.
Lessons from the Stanley Works/Black & Decker merger
As we consider the current M&A climate, the Stanley Works and Black & Decker merger suggests similar opportunities may exist post-Covid-19.
1. The merger was successful because the companies were able to find synergies in multiple business functions. That strategy remains viable, provided those synergies can be realized. Many M&A transactions rely so heavily on theoretical synergies that any missteps in their actual achievement may leave the newly combined company unprofitable. Taking great care in the development of synergy targets, conducting a sanity check of the figures, and creating highly detailed plans for post-merger integration are essential to minimize execution risk. With that caution in mind, there may be opportunities for cost savings by combining workforces with a competitor with meaningful G&A expense. 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.
2. Much like the Great Recession, the post-pandemic environment might see similar consumer spending fallout, especially on discretionary items. While it might have been previously inconceivable, consider if the current market dynamics might better support a company of combined competitors, rather than battling it out as independents. More specifically, assess if the market is likely to have demand, but with price playing a prominent role in the decision-making process. If so, combined competitors, with an improved cost structure, will be compelling.
Judging the success or failure of acquisitions with the benefit of hindsight is easy, but that doesn’t mean we can’t improve the likelihood of successes by learning from the past. Take an honest assessment of the competitive landscape of your industry, think creatively about deal structures, and consider M&A as a tool to help navigate uncertain times.