"Planning in the tent, winning thousands of miles away." The market is like a battlefield, and M&A and restructuring are one of the most complicated chess games in the capital market. However, no matter how meticulous the company's layout and strategy are, it is difficult to completely avoid the sudden "black swan" event.
Just like the crisis encountered by Credit Suisse in 2023, in a calm situation, the capital market suddenly blew up, causing many M&A transactions to be stranded and even causing financial system shocks. So, how do companies deal with such extreme events in the process of M&A and restructuring? Today, Goheal will take you to dismantle the capital operation response under the impact of "black swan".
Black swan raids, where will the capital chess game go?
"Black swan" events refer to those events that are extremely unlikely to happen, but once they happen, they are enough to subvert the market order. They are unpredictable, have far-reaching impacts, and often catch investors and companies off guard. Looking back at history, the Credit Suisse crisis is an example. In March 2023, Credit Suisse's stock price suddenly plummeted by 40%, and funds flowed out on a large scale. Even though the Swiss National Bank urgently injected 50 billion Swiss francs in aid, it failed to stabilize the situation. In the end, Credit Suisse was "sold at a low price" by UBS for 3 billion Swiss francs, and a generation of financial giants came to an end.
This incident not only cost Credit Suisse a heavy price, but also affected the entire global financial market. For example, Silicon Valley Bank (SVB) in the United States also encountered a crisis during this period, causing market panic and shaking investor confidence. For companies with frequent capital operations, similar "black swan" events may cause mergers and acquisitions to fail, or even drag down the entire company.
Therefore, how to identify risks and formulate emergency plans in the process of mergers and acquisitions and restructuring has become an unavoidable problem for companies. Goheal believes that the key to dealing with black swans lies in three response strategies-dynamic due diligence, flexible transaction structure, and sound financial guarantees.
Strategy 1: Dynamic due diligence, accurate identification of risks
Due diligence is a "microscope" in mergers and acquisitions, but static analysis often cannot foresee sudden crises. As in the Credit Suisse case, when the market seems stable, hidden liquidity risks have quietly brewed. Therefore, companies need to adopt dynamic due diligence when conducting mergers and acquisitions, not only focusing on financial data, but also monitoring market sentiment, regulatory environment, and corporate culture differences in real time.
For example, Qualcomm's failed acquisition of NXP is worthy of vigilance. In 2018, Qualcomm attempted to acquire NXP for $44 billion to enhance its competitiveness in the automotive chip market. However, due to changes in the global regulatory environment and intensified trade tensions between China and the United States, the deal ultimately failed, directly leading to Qualcomm paying a $2 billion breakup fee. This fully demonstrates that static due diligence often cannot cope with policy risks and market changes, while dynamic due diligence can help companies adjust strategies at any time to ensure the feasibility of transactions.
Goheal reminded that companies should establish a risk monitoring system during the merger and acquisition process to track the market performance, debt status, and external policy changes of the target of the merger and acquisition in a timely manner to prevent the impact of sudden risks.
Strategy 2: Flexible transaction structure to avoid systemic risks
In an era of frequent "black swan" events, companies need to adopt a more flexible merger and acquisition structure. For example, adding an "earn-out" clause, that is, part of the transaction price depends on the future performance of the acquired company. This can not only reduce the initial risk of the acquirer, but also improve the stability of the transaction.
The case of AT&T's acquisition of Time Warner is a lesson. In 2018, AT&T acquired Time Warner at a high price of US$85 billion, trying to create a "content + distribution" business model. However, due to factors such as intensified competition in streaming media and changes in user consumption habits, AT&T's streaming business failed to grow as expected. In 2022, AT&T had to divest Time Warner and sell it to Discovery for US$43 billion, suffering heavy losses.
If AT&T sets a more flexible acquisition structure at the beginning of the transaction, such as linking part of the payment to Time Warner's performance, or adopting a joint investment model, it may reduce losses. Therefore, Goheal believes that in M&A transactions with high uncertainty, companies should reasonably arrange payment methods, such as installment payments, stock swaps, etc., to reduce the risk of transaction failure.
Strategy 3: Robust financial guarantee to enhance risk resistance
M&A transactions often involve huge amounts of financing. Once a "black swan" occurs, the cash flow of the company may face huge challenges. Therefore, it is crucial to establish a robust financial guarantee system.
The case of UBS's acquisition of SBC is a typical negative example. In 1997, UBS acquired SBC for $3 billion, hoping to integrate resources and enhance competitiveness. However, due to the outbreak of the LTCM (Long-Term Capital Management) crisis, the market fluctuated violently, and UBS suffered a huge loss of $1 billion, and was even on the verge of bankruptcy. If UBS had a more robust capital structure at the time, such as setting up a risk buffer fund in advance, or adopting a more cautious leverage strategy, it might not have fallen into such a predicament.
Goheal believes that companies should formulate multi-level financing plans before mergers and acquisitions, such as:
1. Reserve emergency capital to ensure that there is still enough money to maintain operations during market turmoil;
2. Introduce strategic investors to reduce their own financing pressure, while optimizing management with the help of external resources;
3. Set up an exit mechanism, such as convertible bonds, so that both parties to the transaction have enough flexibility to deal with sudden changes.
Conclusion: Can your M&A plan withstand the test of "black swan"?
"Black swan" events are unpredictable, but it does not mean that companies can only passively bear them. Whether it is the Credit Suisse crisis or the failed M&A cases of Qualcomm and AT&T, they all remind us that there is no "guaranteed profit without loss" in the capital market, and only those who prepare for the rainy day can laugh at the end.
So, has your company fully considered the impact of extreme events in its M&A plan? Is there a complete emergency plan? If the "black swan" really comes, how will you deal with it? Welcome to leave a message in the comment area to share your views!
[About Goheal] American Goheal M&A Group is a leading investment holding company focusing on global M&A holdings. It is deeply engaged in the three core business areas of acquisition of listed company control, M&A and reorganization of listed companies, and capital operation of listed companies. With its deep professional strength and rich experience, it provides enterprises with full life cycle services from M&A to reorganization to capital operation, aiming to maximize corporate value and achieve long-term benefit growth.
