05/03/2022
Over the arc of time history has recorded dozens of dramatic inflection points that altered the way we lived and worked as humans. Great wars of the past most notably left the deepest scars on us given the sudden changes to everyday life in favor of something new. But despite these new challenges we still learned how best to adapt, and prosper. And today, living in a Covid-19 pandemic world is one of those times.
Currently the USA has roughly 125 million US service workers. And given the “new normal” post pandemic, this means millions of staff are now and will continue to work from home in their new “hybrid” job for some time.
Still, despite the precipitous drawbacks in the midst of a global pandemic over the last 2 years M&A deal activity in 2020 and 2021 was surprisingly robust. According to a recent Pitchbook Global M&A Report: “Economic resurgence paved the way for record activity in both North America and Europe, with aggregate deal value at US$2.8 trillion and US$1.8 trillion, respectively.” Deal value in 2021 totaled nearly US$5 trillion, topping 2020 by a whopping 50%, and is expected to continue higher this year.
But how can that activity level be the case when so much of our M&A business was done face-to-face?
Enter the Hybrid Remote Worker world
Like most industries and companies impacted by Covid-19, Investment Banks anticipated a big transaction downturn during the pandemic. However, much to everyone’s surprise after an initial decline in transaction volume, the sale of companies quickly reversed. Fears that Covid-19 might delay deal ex*****on combined with prospective tax increases caused more transactions to close, not less.
“We realized quickly that our job had not changed much,” says Janas CEO and Chairman Carter Freeman. “Given our 80% close rate over the last 25 years, I knew we could adapt if we fell back on our core Mission Statement… to go the extra mile every day.”
And from there, we learned quickly that our reputation at Janas hadn’t changed either, we remain a firmly trusted intermediary tasked to bring together Buyers and Sellers, bridge their key concerns with their legal and financial advisors and get the deal done. That meant for historically face-to-face discussions including Representations & Warranties, escrow hold-backs, earn-outs, deal contingencies, employment agreements, quality of earnings and valuation reports all needed to get done entirely by remote means. But how?
For many, Covid-19 forced upon us a new paradigm in M&A: “The online automation of transactions.” Given the increased deal flow and the decline of face-to-face meetings, the need to adopt more effective communication and work-flow technologies has taken center stage.
And thanks to many new online technologies, including videoconferencing, collaboration and e-commerce tools like ZOOM, we discovered a lot more than handshakes can get resolved in a remote working context. We discovered the key to successful remote M&A work is to build trust in words and pictures like never before. Which is why we try to make every “virtual” connection personal, engaging and productive for all participates. And it worked!
Post Covid as much as two-thirds of M&A deals can now be completed remotely, saving valuable time and money. Thanks to our adoption of new technologies Janas’ clients can benefit from this streamlined process. AXIAL.com for example and other sell-side cloud-based portals allow Buyers and their advisors to confidentially sign NDAs, read CIMs, review financial statements and ask key questions about companies we have for sale. In fact, online document and signature verification exchanges such as iDeals and DropBox make printing paper and mailing documents past tense.
How has Covid-19 and the new hybrid work model impacted M&A Due Diligence?
The devil’s always in the details. But while many areas of the M&A sale process have been impacted by the pandemic, Buyers today are digging deeper and asking key questions about Covid.
1. Remote Hybrid Worker Compliance. Whereas Covid-19 has upended the work environment, remote workers now have a legitimate claim to work from home for extended periods. This new reality calls for an expert Due Diligence audit of job descriptions to identify which jobs can be hybrid and which can’t. Key question: Are the impacted employees on board?
2. On-site Covid-19 Compliance. Is the Seller’s workforce complying with and agreeable to the company’s new Covid-19 work rules? A mismatch here can unravel a deal. What is the status of workforce health and safety pertaining to Covid-19? Is the Seller complying with OSHA regulations? Is there a Covid-19 test, tract and remediation system in place? Is a labor shortage impacting the company? Does the Seller have a hybrid, remote worker human resource plan in place, or is management winging it?
3. Financial Covid-19 Compliance: Does the Seller have proper accounting for Covid-related state and government financial aid benefits including loans, grants and other affected expenses? Some expenses may be an EBITDA adjustment, some not. These days a Buyer’s financial due diligence team is newly tasked to identify any material gaps in Covid-19 financial compliance that can kill a deal.
4. Legal Compliance: Adding to the already long list of Legal Due Diligence, the effects from the global pandemic have added several more. Today the Legal team must review any legal areas directly impacted by Covid-19. The affects can range from customers to employees to suppliers and back.
Many once routine contract reviews are now examined for how they fit into the new normal. Foremost are agreements needed to enable remote hybrid workers to perform their jobs while still complying with federal and state labor laws. Meanwhile, employers with onsite union workers under collective bargaining agreements are facing new compliance regulations. Some rules such as paid leave, sick time, Covid-19 health expenses and family care demands may be transitory, others not. Do you know which is which?
Supply contracts, including those that include performance or volume purchasing discounts may no longer fit the bill. What recourse does a Buyer have if a supplier is out of sync and fails, triggering a material adverse effect or force majeure? New or modified contracts must align with current market conditions and Buyer expectations. These agreements and their performance requirements may need revisions. Did you anticipate this?
5. Insurance Compliance: Covid-19 has caused a complete review of all corners of a company’s insurance coverage. Notwithstanding prior claims and future coverage, Buyers want to review first-hand how the Seller’s insurance is covering claims in the new normal and how the cost of required coverage may change. Covid-19 put the pin in insurance coverage. So be warned!
Nevertheless, at the end of the day the important message to grasp in 2022 M&A is that hybrid work models can work well. However, advisors must adopt new hybrid work technologies and training internally to best communicate a seamless sense of confidence to clients and their advisors, which is what we do best and yet another example of why partnering with Janas early on makes perfect sense.
Rick Andrade
