Covid-19 Changes the Game

Private Capital Weekend has just occurred, accompanied by numerous announcements of chunky M&A deals at high multiples and much positivity from banks and advisory firms spruiking the future takeover landscape. Is this a Trumpian refusal to accept an inevitable depression or has the takeover climate changed fundamentally? A straw in the wind is the Level 4 lockdown decision by a smart Auckland law firm specialized in M&A to close its doors. Prescient?

We last wrote about New Zealand’s nine post-war recessions, where the unemployment rate and capital transaction activity are pretty reliable lag indicators of weak business confidence.   In the most recent recession, 2008 / 10, the raising of private capital and the completion of takeovers dropped away to zilch. So why would the upcoming one be different?

The traditional argument goes like this: –

  • Willing Sellers:
    • NZ is entering a recession of unknown length and severity
    • The lockdown overwhelmed many owners, especially Boomers. Their loss of resilience, confidence and reserves may lead to their quitting business, if possible.
    • Business not producing free cashflow
    • Weak or fragile going in; incapable of solvent survival post-wage subsidy.
    • Owners fearful of a more socialist government
  • Willing Buyers:
    • Strong companies with ambition, competent management, powerful balance sheets and good banking relationships
    • Despite Stock Exchange’s current bubble, asset pricing expected to be well down
    • Industry consolidating/not growing – chance to buy market share
    • Need that special piece to complete our strategic jigsaw or gain competitive edge.

Of itself, this thinking is unlikely to produce many transactions in a recession. It didn’t previously! The gamechanger is what Covid-19 has taught us – the new dominance of Technology!

Smart technology applications have enabled companies to survive lockdowns, serve their customers, speed up decision-making and position themselves for an accelerated recovery.  Among the tech impacts: –

  • Digitization – a megatrend bringing impact on automation, AI, analytics etc
  • Sales and logistics channels – new ways to engage with customers
  • Remote, flexible meeting and working
  • Accelerated cashless society
  • Fundamental driver of productivity

To compete in the new game, companies must pick up the ball and run, urgently equipping with leading tech applications as basic business drivers and model changers.  In New Zealand, our TIN200 portrays buoyancy and scale beyond most other sectors. Growing at 10% p.a., the TIN200’s combined revenue (already $9bn) was predicted by its CEO to pass dairy in a few years. Whether in med-tech, agri-tech, fintech or the wide range of data and productivity applications, we have some mighty smart and increasingly profitable tech sector companies. Globally, Stock Exchanges recognize growth prospects and financial maturing in remarkably high values placed on tech shares.

My proposition is that New Zealand private companies with Intellectual Property of global potential are automatic targets for takeover, with acquisition appetite enlarged by the Covid-19 game-changer.

Despite the widely predicted carnage in capital markets, M&A transaction volume in the technology sector may surprise.



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