the times | Monday August 3 2020 1GM 37

CommentBusiness

Manufacturers

worked together to

build a new ventilator

Amid all the turmoil, this may be

an ideal time for corporate M&A

O

ne of the questions that

doubtless will be

addressed by any public

inquiry into the

government’s handling

of the pandemic is the role of the

private sector. Some have suggested

that 30 years of outsourcing have

weakened the nation’s ability to

respond to Covid-19. In my view, the

reverse is true.

Any country faced with a crisis

has to draw on the nation’s entire

resources. Taxpayers cannot keep

on standby all the resources needed

to cope with a once-in-100-years

event, so when a crisis strikes

governments turn to private

companies for equipment and

services.

Crises are always different;

billions could be spent on making

preparations for the last crisis, only

to find that they are irrelevant to the

next. The financial crash left the

NHS undisturbed; this time it is

front-and-centre.

Almost certainly an inquiry will

conclude that the nation should

have been better prepared for a

pandemic — it was widely known to

be a risk — but asking politicians to

divert money from treating the ill of

today to buying stocks of PPE to rot

in warehouses for the possibly ill of

tomorrow is unrealistic.

The private sector can help to deal

with the unforeseen. It is the nation’s

reserve army, ready to support the

government with the products and

services it needs. For this crisis,

Britain needed ventilators, PPE,

sanitiser, vaccine development,

drive-through test centres,

industrial-scale laboratories and

thousands of people for contact

tracing. There was not much call for

those in 2008.

The private sector brings speed,

choice, innovation and management

skills in times of crisis. During the

pandemic, it has done its job well.

Does it matter that we now have

more ventilators than we need? Of

course not. We have too many

ventilators for the same reason that

we have empty Nightingale

Hospitals: we have succeeded in

protecting the NHS and flattening

the peak of infections.

People marvelled as the Chinese

were able to build a huge hospital

within weeks in Wuhan, but, thanks

to the army, the Cabinet Office, the

NHS and companies such as Mitie,

Interserve, Balfour Beatty and Kier,

the UK built and equipped ten brand

new hospitals in about eight weeks.

That is one of the fastest expansions

of hospital capacity achieved ever,

anywhere in the world.

Likewise, the government wanted

to create a significant contact-

tracing capability. It had to make a

series of compounding guesses. How

many cases would there be at the

peak? How many contacts would

each person have? And how many

phone calls would it take to reach

each contact? Multiplying these

guesses together implied that we

would need about 25,000 full and

part-time people — a team about a

third of the size of the British Army.

This team was recruited, trained and

equipped with secure IT in only six

weeks by NHS Professionals, Public

Health England and more than 30

companies, led by Serco and Sitel.

The government employs

thousands of companies and more

than a million private sector

employees and is able to to mobilise

these resources quickly. They know

what is required to deliver public

services and can react rapidly to

requirements.

We will learn many things from

the pandemic. I hope that people

will take greater interest in the

quality and resilience of our public

services and that they will be more

respectful of the contribution made

by the people who deliver our public

services. The logistical expertise and

ability to implement contingency

plans that the armed forces have

brought to our national effort are

important and they need to be

nurtured. Contingency planning

always looks expensive when you do

it, and cheap when you need it.

When the inquiries write their

reports, I hope, too, they will

acknowledge that almost as many of

the people who stood on the

frontline in hospitals, call centres,

prisons, railways, buses and care

homes and who cleared dustbins

were employed by private

companies as by the government.

Nobody can say that their

commitment, care, courage and

dedication were any the less because

their payslip was not embossed “Her

Majesty’s Government”.

Ian King

Rupert Soames

Visibility for

business has seldom

been worse.

Lockdowns, full or

partial, remain

widespread. The most divisive

American presidential election of all

time looms. Protectionism is

mounting around the world.

Consumer spending in many

countries is set to fall as joblessness

rises with the end of furlough

schemes. In Britain, doubts persist

over whether a trade deal with the

European Union can be secured

before December 31.

On the face of it, then, it’s not an

obvious time for companies to be

embarking on mergers and

acquisitions. Look more closely,

though, and there are ingredients in

place for an autumn of M&A.

First, debt is cheap, particularly in

the United States, where the Federal

Reserve has committed to buying

$750 billion of corporate bonds or

exchange-traded funds that hold

corporate bonds, backstopping some

of America’s largest companies. That

sum may sound small in the context

of a corporate debt market worth

more than $10 trillion and a fixed-

income exchange-traded funds market

holding assets worth more than

$960 billion, but it has left many

corporates flush with cash.

The cost of bank borrowing also has

fallen and its availability has

increased. Think how, during April

and May, many large corporates

rushed for liquidity by drawing on

revolving credit facilities. More than

$32 billion was raised in this way

between the beginning of February

and the end of May. Other companies,

particularly in March and April, raised

capital via the equity markets.

Second, consider how chief

executives have spent lockdown. After

the initial chaos of Covid-19,

during which many

sought simply to secure

their businesses, most

have been working

from home. Spared

the chore of many

time-consuming

meetings, chief

executives have

had valuable time

to reflect what

they want to do with the businesses

they lead. Financial services

executives, for example, will have

pondered whether, with so many

colleagues working from home, they

will need as much expensive office

space in the City or Canary Wharf.

Manufacturing bosses, having seen

supply chains stretched to the limit,

will have rethought inventory

management. And almost every chief

executive will relate how, during the

turmoil, it has been possible to push

through operational changes quickly

that, in the pre-pandemic world,

would have taken years.

There is a fair chance, too, that

some executives will have dusted

down investment bank pitches to

merge with or acquire such-and-such

a company.

There is plenty of evidence that

many chief executives are already

thinking differently about strategy.

Consider, for example, the

unprecedented way in which Sanofi

Pasteur and Glaxosmithkline, two of

the world’s biggest vaccine producers,

have collaborated to try to come up

with a vaccine for Covid-19. Or how

manufacturers and a clutch of

Formula One motor racing

constructors quickly formed a

consortium to deliver thousands of

ventilators for the NHS. There is

every reason to suppose that such

thinking outside the box, as the

consultants love to call it, will outlive

the pandemic.

Third, private equity remains flush

with cash. According to Preqin, the

data provider, private equity firms

were sitting on $1.48 trillion of “dry

powder” at the end of June this year.

As Michael Carr, global co-head of

Goldman Sachs’s mergers and

acquisitions group, puts it: “This, to

me, feels like their time. I say this

because they have, very interestingly,

developed a number of

different structures to put

money to work. It used

to be that private

equity were trying

to do leveraged

buyouts, were

trying to take

companies

private — they, of

course, have that

opportunity now

— but they also

have places where

they are providing

capital for companies,

either because those companies are

not well enough capitalised, or

because it gives them an opportunity

to expand their business. Either way,

private equity continues to grow.”

A fourth factor, possibly, could be a

more relaxed attitude from regulators.

On Friday Alstom won European

approval to buy Bombardier’s rail

business a year after the European

Commission had blocked its planned

merger with the rail division of

Siemens. In Britain, Lord Tyrie, seen

as a potential obstacle to a lot of M&A

activity, has stepped down as

chairman of the Competition and

Markets Authority.

During July, there were signs that

M&A is starting to stir. Chevron, the

American oil major, agreed to buy

Noble Energy, a shale producer, in a

$13 billion deal. Adevinta, a Norwegian

online market place, agreed to buy

eBay’s online classified ads business in

a deal worth $9 billion. Centrica, the

owner of British Gas, agreed to sell its

North American energy business to

NRG Energy for $3.6 billion. Last

Friday Thyssenkrupp, the German

industrial group, finally sold its

elevators business to a private equity

consortium for $20 billion and it was

reported that Nvidia, the American

chip manufacturer, was in talks to buy

Arm Holdings, the British-based chip

designer, from Softbank for $32 billion.

So how might the autumn play out?

According to Mr Carr, there could be

an unusual number of stock-for-stock

transactions, as with the Adevinta-

eBay deal. “They tend to be rare,” he

said. “Buyers usually prefer to pay

cash because it’s a lower cost of

capital. And that is really a condition

of what’s happening in the credit

markets.

“It is a much safer structure than

you typically see where you have [a

buyer taking on] an enormous amount

of leverage. In this case, you have a

much safer capital structure going

forward and without any stress on

your balance sheet.” That sounds

positive for those companies whosed

shares have rallied most smartly

since the carnage

of March — and

bad news for those

whose shares have

not.

‘‘

’’

Ian King is business presenter for

Sky News. Ian King Live is broadcast

at 9.30am and 1.30pm from Monday

to Friday

Rupert Soames is chief executive of

Serco

Philip Aldrick is away

Our outsourcers stepped

up when the country

really needed them most

tor

Covid 19,

cure

ost

developed a n

different s

money

to be

equ

to

bu

tr

c

p

co

op

—

have

tthey a

capital f