2020 must be the weirdest year for most people in their whole life yet. The COVID-19 has huge impacts to every people over the world on their daily life and work mode. The lockdowns make contacts in person difficult. Except e-commerce, almost all the other types of business and transaction suffer.
However, M&A and fund raising are not really undermined, especially in Semiconductor section, actually 2020 is the best performed year in term of the total size of
transactions. According to Freshfields’ M&A monitor, the overall turnover of global M&A has exceeded $1,700 billion till the end of September, featured with the remarkable deal of Nvidia acquiring ARM.
Such phenomenon should be partially attributed to the never stop Nasdaq floating on the immense liquidity released by the Federal Reverse, although whose
original intention was to support the suffered main street economy. The tech competition, especially between US and China, is another important catalyst for the increasing high-tech transactions as more people realize high tech instead of oil is actually the most important strategic resource, which has also been reflected on the opposite directions of prices between the two categories of assets.
However, like other transactions, lack of physical contact in high tech M&A deals also makes the cost of communication higher and process of transaction longer. Sometimes it even leads to failure of transactions if under the poor management, especially when the deals involved parties with different languages, time zones, mindsets and customs. It is proud to say Renevo is one of the limited numbers of teams in the world with the excellent experience and complementary skillset across team knowing how to facilitate successful cross-continental deals in current complex circumstance.
With our recent successful two deals closed during the COVID-19 period, we would like to share with you some warm tips and experience on how to make deals successful.
Understand the core demands and concerns
Identifying and matching the demands from parties are always the most critical element for a successful deal. Many deals failed at the later stage of process are essentially due to the mismatch or misunderstanding of the core demands at the beginning. Typical demands from sell side include higher valuation, simpler Due Diligence and faster closing process. These demands are naturally and universally favorable to sell side. However, there are many other core demands are more unique and specific but hidden under the water. For example: special strategic resources to be brought in by the new investors, future funding supports in medium to long term, potentials of expansion into new market and products etc. Renevo is good at assisting parties in the transactions to discover and match such specific core demands in the course of engagement.
Manage risk instead of just identifying risk
Risk is the factor discounting value. Entrepreneurs create value and make money by managing risks. It is same to bankers. From sell side, the risk associated with buy side’s determination and capability to close deal and government approval are regarded as the principal risks.
These risks could be largely managed by right terms in the deal structures and agreements. From buy side, there are more risks need to be considered, the existing business, future prospect, technology advantage, legal proceeding, management team and key employees etc. A long list of concerning points could be formulated after the due diligence easily. One approach is to discount the consideration and reflect these points in the agreement through indemnity and other remedy clauses. However, in a typical competitive bidding process, the final winner is not the one who identified the most risks but the one has the best capability to manage the identified risk.
Culture difference in communication
The remote distance between the two sides set barrier in the form of time difference, language difference and more important culture difference. This is one of most interesting parts of cross-continental transactions. As the expert in this area, we encountered many scenarios with clear culture difference, most cases amusing, sometimes also frustrating, but never insignificant. It does not just refer to difference of business culture, managing the different custom in expression and understanding on daily basis could be accumulated into a
vital part of a successful deal. To ensure the deal on the right track throughout the whole course of transaction, it is important the advisor team could sense and figure out potential miscommunication at earlier stage and prevent the further development by explaining in right
way to both sides.
Prepare in advance
It tends to take more time to conclude a transaction in current circumstance. People could not easily fly from one end of the world to the other end and meet each other like before. Although video conference is an alternative solution for communication, a lot of details are hardly transported through screen. Some critical discussions usually could be solved in one day if all parties sit in same room but now probably need more than one week’s back and forth negotiation. Therefore, a well preparation could help to offset part of such extra discussion time. With trusted advisors and internal team standby, set-up SPV beforehand, designing and practicing investment process well are all helpful to make the process efficient and regarded as favorable evidences from sell side perspective, and sometimes quite critical in a competitive bidding environment.
Set up right schedule and expectation
Apart from the slow down due to COVID-19 across the world, we saw the different paces of investment decision and process in different countries. Although it seems a tight schedule benefits sell side, we need consider the difference of realistic time needed for the process among different investors. If the schedule set up at the beginning was too tight, it either excludes these investors who just could not catch the schedule but actually are good from other aspects, or it needs to give extension to specific investors which make the timeline no longer to be respected. From our experience, the best practice for the process is to consider the whole picture in advance and set up a realistic timeline then respect it. This gives right guideline and transparent expectation to all parties and ensure the outcome is fair for buy sides and best for sell sides. With more good news of effective vaccine come out, the world is expected to back to normal in 2021. It would decrease the complexity and uncertainty of international transactions. but we believe the aforementioned tips should be still applicable and useful in the new normal world, as even the direct impact of COVID-19 may be disappeared soon or later but the indirectly impacts would last a considerable period of time or even forever.
Renevo Capital Limited, Shanghai Office