The Rise of New, Alternative Dealmaking

COVID-19 is rewriting the M&A playbook as we know it. FEI Daily spoke with Mark Purowitz, principal, Deloitte Consulting LLP, about the rise of alliances, joint ventures, and increasingly popular SPACs and what it all means for financial executives.

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FEI Daily: What are the more common alternative dealmaking strategies you’re seeing? How do they differ from more traditional strategies?

Mark Purowitz: Overall, our survey highlighted a deepening trend toward alternative dealmaking strategies that began unfolding even prior to the pandemic. We have seen trends over the past 12-18 months in the greater use of alliances, partnerships and ecosystem plays that have accelerated in a number of sectors due to COVID.

Special-purpose acquisition company (SPAC) transactions are top of mind right now given their resurgence in popularity because they offer faster speed-to-market to take advantage of market opportunities, more certainty around listing and greater flexibility in a company’s capital structure compared to more traditional strategies.

FEI Daily: What are some of the less common but perhaps more interesting methods?

Purowitz: Less common, but still surprising, is the fact that private equity firms have more of an appetite than in the past for alternative dealmaking. While most still prefer traditional approaches, we’re seeing more of a pivot among private equity investors toward alliances, club deals, and PIPE transactions.  All of this is helping us to broaden our definition of M&A for today and into the future.

FEI Daily: What should financial executives know about the rise of these new strategies? Are they here to stay?

Purowitz: Right now, we are seeing the acceleration of alternative dealmaking trends that were already emerging prior to the pandemic, so it’s very likely that these trends will persist in some way, shape or form even after we eventually put the pandemic behind us.  Ecosystems in certain sectors and geographies were significantly impacted which required new ways of putting them back together which will take time to play out, and alternative deal constructs are offering greater optionality for finance executives to find value.

SPACs and other alternative transaction types will likely follow the ebb and flow of the macroeconomic environment, but other trends are more likely to stick for the long-term, with potential to really shift the M&A playbook. COVID-19 has caused many dealmakers, for example, to move fully into a virtual dealmaking environment. But even before 2020, many steps in the dealmaking process were being done remotely and through digital channels, so we know there’s already an appetite and comfort level with that medium. Looking ahead, most dealmakers hope to either continue their current virtual dealmaking approaches (55%) or want to implement hybrid approaches (35%).

There are, of course, a number of significant implications these trends have on financial professionals that could make or break deal closings and successful integrations.

If we look at the pre-close stage, the accelerated M&A timeline involved in SPAC deals can be immensely stressful on finance teams, of which 32% reported concerns around the potential of prolonged due diligence in a virtual environment that will adversely impact the deal process. In addition, the complex financial reporting requirements for public companies can be daunting, especially for the accounting standards that have become more complicated as a result of the pandemic, such as credit loss reporting and forecasting. Many of the private companies electing SPACs today are also in the pre-profit growth stage, which can make it more difficult to estimate valuations for M&A activity and fulfil related SEC reporting requirements. SPACs may be an “easier” option compared to traditional M&A, but they come with a crash course in navigating complex and nuanced public company SEC requirements along with investing in all of the capabilities necessary to be a well-functioning public company. If finance professionals aren’t careful, the complexities of the pre-closing stage can easily become a double-edged sword.

Post-deal integration is another critical stage for finance professionals, especially in our current virtual environment. We’re still on the front-side of dealmaking during the pandemic and haven’t yet had the chance to see how integration challenges will play out in real life, but this is something with which dealmakers believe they’ll struggle. Dealmakers emphasized a number of virtual integration hurdles in our survey, including ones like operating model adoption and legal entity alignment and simplification which have a direct impact on organizations’ finance functions. Regardless of transaction type, integration is likely to become more complex in our virtual world. Finance teams should pay careful attention to how their operating models will need to evolve and modernize, especially in how talent comes together and performs in a virtual/hybrid setting to sync up internal controls for financial reporting, merging financial records that may be in both GAAP and non-GAAP, identifying and implementing business synergies, and more.

FEI Daily: What are the impacts of the upcoming election on dealmaking?

Purowitz: Despite the sharper shift toward more domestic deals, we found that M&A executives are split in their assessment of the impact of the upcoming U.S. presidential election on deal activity. Nearly equal amounts have accelerated (23%) and slowed deal activity (25%) due to the pending election. Similarly, dealmakers also indicated that this year’s election season has made closing deals both easier (16%) and harder (18%).