Topic A in the M&A business — like every other business right now — is the extent to which virtual meetings and other practices of the COVID-19 era will remain as conditions normalize.
A few months ago, one of the leaders of Goldman Sach’s global M&A practice noted that 95% of the deals Goldman completed in 2020 involved no face-to-face interaction. For asset-based businesses, the firm started using commercial-grade drones for site visits and flyovers.
This may work for multi-billion dollar transactions featuring dozens of facilities. The so-called middle market — where Greenberg Variations Capital (GVC) advises clients and GF Data collects deal data — is a different world. Most buyers I know would react to a drone tour of a business the way a 10-year old would react to a drone tour of Disneyland.
Before talking about the interplay between in-person and virtual experiences on the transaction landscape, a word about the landscape itself. Businesses sell in three general ways, with gray areas among them: broad auctions, targeted auctions, and one-off processes.
In more targeted processes as well as in broad auctions once they reach a select pool of contenders virtual technology offers diminishing returns.
GVC is predicated on the view that any one firm can do two of the three well, but it is challenging to execute at a high level on all three. We specialize in the latter two — circumstances where the counter-party has been identified or will be one of a select group. We don’t do “regular way” auctions.
As the Goldman experience signifies, this is the area where virtual technology will be most relevant. A business chooses a broad process, with as many as 300 prospective buyers. Its advisors prepare materials that necessarily address the firms in that cohort least knowledgeable about the business and its industry.
The exercise of narrowing the field to a handful of final contenders consumes the time and the energy of company management. Remote technology has turned out to be indispensable in marshaling this resource. Indeed, this trend was underway before COVID-19; sophisticated sell-side bankers had already begun to embed video in their offering materials.
With respect to regular-way auctions post-COVID-19, the bar for in-person management meetings will remain much higher than it was pre-pandemic; and the bar has also been elevated for the regular way auction itself there will be more one-off or targeted processes and fewer in which the clients feel they need to reach a “cast of thousands.”
A video can show you production lines and processes, but an alert seller will want to show more — and an alert buyer will find more.
In more targeted processes — as well as in broad auctions once they reach a select pool of contenders — virtual technology offers diminishing returns.
Based on my own experience and conversations with others, I see these as areas in which in- person contact remains indispensable:
Client Bonding
Business owners hire even the most exalted investment bankers with the suspicion that we are at heart self-interested vendors, not advisors who will act in their best interest. Seasoned practitioners overcome these suspicions in the early stage of each engagement. What I have seen over the past year is how much longer it takes to do that when you have never met in person.
Buyer Separation
Friends on the buy-side seem to agree that they would not have wanted to be without virtual meetings this past year, but they constrain the ability of outstanding buyers to separate themselves from the pack. They work fine for gathering information and asking questions, but the best buyers are like trial lawyers. They work the jury. It is a professional pleasure to watch a successful acquirer captivate a selling client with a compelling vision for scaling a business or integrating it post-close. B-plus buyers should love the virtual experience because it foreshortens the gap between them and the A’s.
Seller Dynamics
I often say (not to my children, for obvious reasons) that being a sell-side banker is like being a parent you try to treat everyone fairly, but that doesn’t mean equally. If you are in a room, you see who your client likes who they are likely to gel with. These intuitions govern at the margin the guidance that a good banker gives to competing buyers. In a conference room, you can see the tightening in the business owner’s jaw when the would-be buyer who has been so attentive to him checks their phone every time the owner’s son or daughter is speaking. Try that on Zoom.
The Facility
A video can show you production lines and processes, but an alert seller will want to show more and an alert buyer will find more. How busy is the second shift? Is there is a suspicious amount of work in process in the yard? How does the owner relate to his team?
Years ago, I was touring a metalworking plant with a private equity buyer. As we moved from station to station, the CEO enthusiastically set up and stamped out pieces for us. At the end of the tour, I pointed out that my client certainly seemed to know his way around the shop floor. That may be, said the private equity buyer, but did you notice something else? Not once did he call one of his employees by name.
The Deal
Recently, I have been dealing with employment contracts for continuing management in several situations. The proper way to deal with questions of job responsibility, compensation, separation and non-competes is to get into a room and talk about them. It might take a few hours. If one side needs to caucus separately, they can do it. If someone gets hot under the collar, you can take a walk and find the coffee pot. Covering the same ground by phone or video is painfully attenuated.
Some virtual interactions will stay with us post-pandemic, but in the process of selling or acquiring an owner-managed private business, there is nothing like being there.