Liquidity Deloitte insight

By Ruairí Ó Dochartaigh, director

Ruairí Ó Dochartaigh, a financial advisory director at Deloitte in Wales and the South West, looks at how liquidity in the short and medium term will affect M&A, and what Welsh business owners should consider when looking to raise funds or transact in the current environment.

I’ve recently been asked by clients what will drive M&A activity in the near term, especially as since early March there has been such a degree of market disruption and a significant focus has been placed on liquidity by many businesses and so, whilst a number of existing transactions have been disrupted, other opportunities have arisen.

Continued focus on cash

With the lockdown easing and trading resuming, I do not anticipate the focus on liquidity changing, and we may in fact experience a second wave of cash pressure as supply chains and working capital ramp up during recovery.

However, I also believe that businesses will have to concurrently refocus on the medium term funding as they adapt to a new market context and likely different capital requirements for their business.

It will be essential that businesses continue to adopt rigorous cash flow management strategies for both short term requirements to manage the period of transition of unlock (itself not necessarily an easily predictable journey for many sectors) as well as securing robust funding platforms to thrive into the medium term. Our firm has been assisting various clients with dealing with liquidity considerations using our Emerging into a post lock down world framework document.

Looking ahead

It’s likely that liquidity requirements will drive M&A activity in the second half of 2020 from two differing perspectives, in particular:

  • Supporting medium term growth opportunities – the huge amount of disruption across so many markets arising from COVID-19 has created many stresses, but also numerous new business and growth opportunities that are being identified and explored by entrepreneurial and forward thinking businesses. From my experience, many of these present opportunities in adjacent areas where businesses don’t currently have deep expertise or resources to pursue fully – in this context I expect to see increased M&A activity being pursued involving growth capital and partnership/joint venture type structures.
  • Accelerated M&A – due to the severe disruption caused by COVID-19, many businesses will likely experience heightened liquidity pressure during the unlocking period. I expect to see this particularly as government support mechanisms begin to unwind, operations restart/ramp up and where customers’ buying patterns do not create sufficient revenue to efficiently support the increasing overhead base.  For those businesses that do not have further available funding from existing resources I expect there to be an increase in the accelerated M&A activity pursued as part of a business’s wider options appraisal.

Focusing on the consumer and retail sector

From what I’ve seen in the region over the past few months, I doubt there isn’t a single company across the consumer and retail sector that hasn’t been affected by COVID-19. You can see the effect on these businesses in a variety of different ways, ranging from severely impacted and forced closure, through to significant new opportunities and revenue growth, depending on where they fit into the supply chain, their particular product portfolio as well as channel focus.

Planning is key

Given the challenges posed by COVID-19, including accurately predicting future performance levels and credibly convincing others of such, now more than ever it is critical that businesses approaching new investors or partners do so in a structured and well-planned manner in order to best position themselves - particularly as there exists heightened due diligence and appraisal requirements to successfully secure transactions.

I believe that scenario-planning, clear communication and preparation will be critical to successful conversations and relationships with new investors or partners.

Indeed, my colleagues and I are currently working with a number of clients from many different sectors across Wales and the South West on projects to support fund raisings and partnerships that will support anticipated strong growth in the future. In addition, we are also supporting other clients with option planning as they face more acute short term liquidity pressures.

Ruairi ODochartaigh Deloitte 110x110

Ruairí Ó Dochartaigh, Director, Financial Advisory

Ruairí has significant buy- and sell-side transaction experience gained across numerous sectors, with a particular focus on consumer, including the food and beverage sectors. Roles have included leading UK and cross border assignments for numerous clients ranging from individuals, private equity and owner managed, as well as listed companies. He has also led various capital raising and strategic business planning mandates for clients, as well as capital restructurings for financially stressed businesses.

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