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by Baker McKenzie

M&A in the wake of Covid-19: strategies for a healthy business

Several months into this global pandemic and businesses are facing a pivotal moment. Government reinforcement from bailouts and support schemes has been quick to land, but despite this injection of liquidity, the global economy will shrink by 5.2 per cent this year according to the World Bank, triggering the deepest recession since the Second World War. To avoid becoming a casualty of the pandemic, businesses must instigate a robust evaluation of their own operations to capitalise on the opportunities available.

Thorough company health checks are always a good idea, but with Covid-19 reshaping the business world, they are more important than ever.“To have real transformation you need to be rigorous day after day,”points out Christophe François, Senior Partner at McKinsey & Company. Although it has been a slow half year for the M&A market, experts forecast significant accelerated investment opportunities prompted by a wave of distressed M&A.

During the lockdown dealmaking required creativity, with site visits conducted by drone and IPO roadshows done virtually. Other challenges have been harder to manage, though, and businesses have had to deal with interrupted supply chains, demand issues and rapidly changing government support and restrictions. However, as Ai Ai Wong, Global Head of Baker McKenzie’s Transactional Practice Group and Chair of Asia Pacific region, notes:“Nothing is going to stop people making deals if they are determined, and all the more so when it becomes defensive.”

Activity is being driven by a bid to increase balance sheets, shore up portfolios, create resilience and take advantage of attractive deals, and it is being facilitated by end-to-end digitalisation. Fuelled by significant liquidity in the market, companies are focusing on new partnerships and business structures to weather this storm. Low interest rates and availability of funds in the market means that businesses are in a position to pounce, with private equity and family companies predicted to fare well.

“Boards are considering transformative M&A,” says Nick Bryans, Partner in Baker McKenzie’s London M&A team.“They are offloading assets to focus on core operations, and ridding themselves of assets performing badly.” As businesses attempt to recover from the crisis, there is a golden opportunity to go to market, raise funds, bolster portfolios and mitigate the effects of the pandemic. However, this window is closing. As François explains: “It’s winners that make bold moves in portfolio investments. It’s time to make bold moves.”

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The Occidental megadeal that didn’t go quite as planned

M&A is tough. Megadeals can be even tougher. That’s exactly what Vicki Hollub, CEO of Houston-based Occidental Petroleum, discovered with last year’s $55bn takeover of US shale oil producer Anadarko Petroleum.  

In May 2019, with the $10bn backing of billionaire investor Warren Buffett, Hollub successfully managed to fend off Occidental’s larger rival Chevron in one of the most memorable takeover battles in recent years. 

Not only did she manage to block Chevron, she got the deal done against the wishes of one of the company’s largest individual shareholders, the activist investor Carl Icahn. He, along with some other shareholders believed the deal was simply too expensive.  

Buying Anadarko saddled the company with a massive debt of more than $40bn.  

The timing couldn’t have been worse for Hollub. At the beginning of 2020, oil prices collapsed, thanks to a price war between Saudi Arabia and Russia, and a global pandemic that no-one could have predicted.  

As oil prices fell, Oxy’s share price tumbled.

The company took a series of emergency measures to shore up its financial position, including cutting capital expenditure and slashing the dividend on its common shares, the first payout cut since 1991.

To bolster its balance sheet further, Oxy recut its deal with Buffett, giving him shares in lieu of promised cash payments.  

With Occidental weakened, Icahn attacked, building up his stake in the company, and in a March interview, made no secret of the disdain in which he held the board.

“The company is terribly run. They had to cut the dividend. The oil price is again the match that ignited it. In another culture, the board, the people on the board, would have the dignity to resign.” 

Despite Hollub’s best attempts to prevent him, Icahn eventually succeeded in seizing four seats on the Oxy board. 

Today, the company’s share price is still well below what it was before the Anadarko deal.   

Back when the megadeal was done, the promise, in the company’s own words, was “to realise the full potential of the transaction while maintaining a strong balance sheet, investment grade credit rating and its current dividend”. 

That promise has now been solemnly shattered, and Hollub’s euphoria at sealing the deal, has surely been replaced by something else entirely.  

See how Occidental’s fairytale megadeal turned into a nightmare with this video from James Fontanella-Khan, of the FT’s Due Diligence team

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