Ragu Bhargava, Co-Founder and CEO of Global Upside, provides an update on global mergers and acquisitions (M&A) activity and drivers behind cross border deals (00:42). He discusses which industries are attracting private equity interest globally (4:55), and explains which due diligence considerations have come into greater focus since the start of the pandemic (7:33).
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Global M&A Activity Update: Growth TV - Transcription
Kathryn: Welcome to this episode of ACG’s Growth TV. I am Kathryn Mulligan with Middle Market Growth magazine. Today’s episode is brought to you by Global Upside, which provides comprehensive accounting, HR, payroll, tax, incorporation, and talent acquisition services to help companies grow both domestically and overseas.
I am joined today by Ragu Bhargava, Global Upside CEO, to talk about global M&A activity, and how it has been affected by COVID-19. We will also discuss due diligence and how it is changing because of the pandemic.
Ragu thank you for joining me.
Ragu: Thank you, Katie.
Kathryn: How would you characterize global M&A activity today, and have you seen the drivers behind cross border deals change during COVID?
Ragu: Yes, absolutely. The global M&A activity has hit a low back to the 2010 level. In fact, compared to the first half of last year, we are down 70%. So, a big drop in M&A activity.
One of the largest deals of the year was HP being acquired by Xerox. Xerox put it on hold because of the uncertainty surrounding COVID-19.
Another very large deal is the acquisition of Willis Tower by AON. That deal even though it is moving forward, it is going slower than expected.
We do expect more deals to fall off as time passes because the pandemic continues to have its impact. Why is all of this happening? Why is there a slowdown? The slowdown is really driven by one – the inability or limited ability to do diligence, and on the other side, the uncertainty as to what happens to companies, in a little bit of a longer-term. So, if you cannot go visit, you cannot do diligence, you cannot see the factories and assess output efficiencies, and other things. And if you have uncertainty around revenue forecasts that can impact the value you realize from these acquisitions. If the value is negatively impacted, people are just sitting on the side-lines and waiting. Waiting to see what happens with the pandemic – how companies fair and then take a stab at acquiring them.
Kathryn: Why is executing a global M&A deal more complex compared to a transaction done within the US? And can you talk about how those processes differ?
Ragu: Katie, what we have seen over the last decade is more and more companies having a global footprint. Why a global footprint? Obviously have access to more market, more revenue, more benefits for the company for sure. What does global expansion bring with it? It brings challenges with facility, with people, and with compliance in these foreign countries where you may or may not understand the law. Now, these factors are operational factors that apply to every global company. These are the same factors that apply to a target when you are doing diligence. Compliance is a very big deal and in the due diligence phase under COVID it is extremely hard. Why is it hard? Because you cannot go travel, you may not have the ability to enter a country, you may not be able to visit the facility. You may not be able to meet people face to face. Obviously, we are doing a lot of our zoom meetings, but not everything can be done remotely, and that presents a sets of problems. Most buyers rely on advisors for diligence, for the structure and other factors that impact the timing and the price that they pay for the target.
The Big Four have a very big play in all of this. However, many of the Big Four have their own moratorium on travel. Some extending as far as the end of this year. So, imagine if their advisors cannot travel, how do you execute? How do you do this? You cannot do it by yourself. Another thing that plays a role in compliances that the government has slowed down, partially shut down. How do you assess compliance? Because the target may not have even have filed all the requirements that they are required to file in the government.
How do you verify if things are filed or not filed? How do you verify that there are filed accurately? Because the government is not operating at full strength. So, from starting off that discussion of due diligence of an M&A, to performing the diligence and integration, these are all factors that are being impacted in a global acquisition, not so much in a domestic acquisition. There is a brighter side to these deals, where most governments today are offering subsidies to not layoff people. So, a buyer may be able to take advantage of those subsidies, and reduce the overall cost they end up paying for the acquisition. There is a silver lining.
Kathryn: Which industries are attracting the most private equity interest globally and are there particular types of businesses that you are seeing US-based investors targeting abroad?
Ragu: Yes, historically what has happened is that the PE firms have gone after recession-proof companies. They are making an investment; they want a nice return on capital and everything makes sense. Today the focus is on what is the future of the planet and the future is a little bit murky, but we know that TMT – technology, media, and telecom has a very strong play in it. Because we are all working from home, we are all working remotely; we need better tools, we need better bandwidth to be able to communicate, to be able to record a video call like this without disturbance. So, TMT is a very hot market.
Healthcare – they are all looking and waiting for a vaccine, no doubt about it so that is important. But beyond that, because our lifestyle has changed so much, and continues to change and evolve our healthcare needs are changing. And as our healthcare needs are changing, the way healthcare is provided, delivered to us and what we need is changing; in many cases significantly.
Manufacturing in cybersecurity – manufacturing is evergreen because we will always consume product, but cybersecurity is becoming more and more important because now we are online, almost 24X7. Because we are online so much, phishing and other cyber threats are increasing. People are desperate to hook you on to the wrong things, so we need more cybersecurity.
A big market that is developing recently is education or E-learning. Companies have to educate their employees, their team remotely through video calls and tools, which may or may not be there today, but education is a brand-new frontier. The K-12 market is exploding because we are used to sending our kids to school, not bringing the teacher home. And now we are in that environment where we are having to bring the teacher home, it is a brand-new world.
The one other thing we are seeing is the economic impact of some of the political unrest, for example, Hong Kong. So, companies are now a little bit wary of having concentration in a country like China, partly because of the pandemic, partly because of the political environment. Countries like the Philippines, India, Vietnam, Thailand, are becoming hotspots for expansion, and growing facilities, manufacturing facilities in particular because there are still lower-cost labour markets, and a little bit more stable than certain other parts of the word.
Kathryn: The COVID-19 crisis has changed much of the deal process, notably the due diligence function which you mentioned a bit earlier. For cross border deals especially are there due diligence considerations that have come into greater focus since the start of the pandemic?
Ragu: A little bit of this I mentioned earlier but HR and operations diligence is always extremely important in these transactions. In the post- COVID environment, what is happening is a RIF or re-sizing of your team can be financially, and politically more expensive. Why? Simple factor, higher unemployment rates. Governments are not allowing or not wanting people to be laid-off.
New rules surrounding social distancing – the factory output can be reduced. Because you can only have so many people working at any given time.
How to assimilate the new team? Because you cannot go meet with them shake their hand present, but you have to do this via zoom calls and other things. Now, the ability to assimilate is also impacted by not just that people are working from home but also your inability to travel. We talked about this earlier, governments are very slow right now in granting visas. If you are not an essential personnel, they may not give you a visa to enter for six months. Many countries have closed their borders, earlier it was the end of June and July, but now some countries are extending that to end of December. So, imagine not being able to travel to any particular country for four to six months. It is a big impact.
In addition to the challenges people are facing with due diligence, there is an expectation that as time passes, and pandemic does not wind down there might be more and more companies that might have a decline in revenue, challenges with survival, and that might drive fire sale type environment, which can be a good opportunity for buyers to sit on the side-line and jump in as that happens.
Kathryn: Ragu, thank you so much for joining me today on Growth TV.
Ragu: Thank you, Katie, for the opportunity.