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Everyone wants an ending, a date on the calendar when all of this is “officially behind us”. However, that seems unlikely to occur in the foreseeable future. This crisis will resolve itself in fits and starts. What we will see is an M&A landscape that may be permanently changed. We’ll focus here on what will happen as the economy begins to re-awaken and what happens if we hit headwinds.
BUYERS WILL APPEAR
PE firms interested in acquisitions are already moving beyond the triage stage internally. At the outset of this crisis, firms were focused on the fiscal health of their portfolio companies, not acquisitions. That will change.
The internal laser focus on existing portfolio companies will lessen as PE firms stabilize the salvageable investments and cull those that are not. This will allow them to again turn their attention to deploying capital into acquisition targets – many of which have become more attractive due to the repricing of the market. Opportunities are likely to abound.
SELLERS WILL NEED TO DECIDE
Some business owners who were considering selling their companies before COVID may hold off on exiting in order to avoid selling at a severe discount. Instead, they will focus on rethinking how they do business in a post-COVID world and implement those plans in hopes of increasing enterprise value. Alternatively, some sellers may choose to accelerate their plans to exit – especially those at risk in the Baby Boomer generation.
LENDERS WILL CONTINUE TO BE DISTRACTED
Debt is a key ingredient in most private equity transactions. Without lenders’ debt commitments, most deals have no chance of reaching the finish line. Banks are currently digging out from their government assistance workload which has demanded most of their attention over the past month. While this focus may change as we move into May, it is very unlikely that it will be business as usual anytime soon. Lenders are now very tentative given their inability to access economic risk and/or assign a value to potential transactions. They will also need to devote additional resources to distressed clients who begin to struggle with cash flow issues.
Public acquirers who can rely less on debt and more upon their own stock as currency for acquisitions may benefit the most during a debt tightening. Watch for public companies to become more aggressive in the post-COVID environment.
VIRTUAL SALES AND PROJECT MANAGEMENT WILL EXPAND
For all M&A participants, business development will still be essential in this new environment, however, it will be quite different. The basic ability to have face-to-face meetings has changed for the foreseeable future. Even if permitted, would you go out to lunch with a prospect next week? Even, if you are comfortable with face-to-face meetings, it makes good business sense to extend the courtesy of asking invitees if they are. There will be a varying level of discomfort with having face-to-face interactions for quite some time — until we have a vaccine.
The key to dealing with this new reality is to learn to excel in the virtual world. As much as we’ve learned to rely on virtual online meetings in the post-COVID world, most of those interactions have been with co-workers, business associations and other groups we are not actually selling to or negotiating with. Being able to successfully log into a meeting with sound and video actually working is no longer enough. The investment banking industry will need to grow comfortable with a slew of new practices. Getting transactions to closing (which very few have done during this crisis) will prove to be much more difficult. The need to read body language, make eye contact, and observe the myriad other non-verbal cues associated with interpersonal communications did not go away with the onset of the pandemic. They’ve merely been swept aside while we attempt to cope with the rapid developments that have occurred over the past two months. Be innovative in your use of remote technology. Having the ability to successfully leverage virtual tools for initial business development through the close of a deal is going to be what separates those who are successful from those who aren’t.
YOU WILL NEED TO PLAN FOR THE WORST
Many countries are beginning to cautiously roll back their stay at home rules. What happens if COVID spikes again just as the economy begins to regain its footing? This scenario has to be anticipated and planned for as a real possibility. Imagine that you had known in advance that the current crisis was going to happen. Now, assume a scenario where this “re-opening” of the economy fails at least once and think about what you would have done to prepare for it — because this time you can. Give serious thought to what will happen to the economy and how it will affect the climate for M&A transactions as well as your clients’ businesses. And, again, learn to excel in the virtual world. Developing a plan to address a potential economic relapse before it happens could be the difference between managing your way through another downturn and throwing in the towel. Be safe.
CFA is capable of providing assistance along the entire spectrum of M&A advisory services. We have over 60 managing directors in 30 offices (in the US and abroad) with broad expertise in a number of industry verticals. For more information, contact your closest CFA office.