Mergers and Acquisitions in the Time of COVID-19

July 29, 2020

By Alexander Cannellos

Economic uncertainty, questions surrounding future business prospects, lack of consensus on valuations, and constantly evolving capital markets have resulted in unprecedented risks and challenges in completing merger and acquisition transactions.  “Mergers & Acquisitions in the Time of COVID-19,” a webcast hosted on July 9 by EisnerAmper,  featured discussion on how deals will get done during these extraordinary times. Panelists included:

  • Ethan Boothe, Principal, National PE Industry Leader, EisnerAmper (co-moderator)
  • Alan Wink, Managing Director, Capital Markets, EisnerAmper (co-moderator)
  • Andrew Gilbert, Co-Managing Partner, DLA Piper
  • Barry Steiner, Managing Director, Ladenburg Thalmann & Co. Inc.
  • John Von Bargen, Managing Director, H.I.G. Capital
  • John Ruckstuhl, Managing Director, Transaction Advisory Services, EisnerAmper

Historic Impact of COVID-19

The world of M&A has certainly felt the impact of the business downturn, and many dealmakers suddenly hit the pause button when COVID-19 occurred in late Q1 2020. Deal value in the U.S. for Q2 2020 dropped approximately 83% compared to the same quarter in 2019, with comparable decreases in the volume of financial sponsor and strategic buyer deals as well. Private equity deal value in Q2 2020 totaled $87 billion compared to $159 billion in Q2 2019, and strategic buyer deal value dropped to $19 billion from $464 billion during the same quarters.

Pre-COVID-19 Deals (March 2020 Snapshot)

Dealmakers on both sides were forced to make tough decisions at the early signs of the pandemic due to significant economic uncertainty:

  • From the buyer’s perspective, many deals were put on hold because there was no way to predict the bottom of the trough. Specific deals were expected to be heavily impacted (i.e., restaurants, travel, etc.), while others held less risk and were far enough along in the process to continue. Buyers assessed their own liquidity. Many kept in touch with sellers, or are reaching back out now.
  • From the seller’s perspective, deals were paused while businesses reviewed liquidity and dedicated key resources to running the operations. Certain sellers, however (like those with strong online sales and the proper technology in place) have been positively affected, and may now consider themselves to be undervalued. Sellers today also feel more comfortable with the buyers who maintained open communication throughout the troubled times.

The Triage Period

During the first four to six weeks of the pandemic, businesses needed to react quickly, and private equity firms had to work closely with their portfolio company management teams to stay on top of the ever-changing environment. Fluid communication was key, and for PE firms, adopting a hierarchy for prioritizing each portfolio company’s level of need proved critical to success. The key issue at the business level was to ensure adequate working capital levels. This led to potentially difficult decisions, sometimes irrespective of how confident the management team felt, as nobody could quantify the possible impact of a downturn. Now, a few months out from March, PE firms are beginning to turn their M&A engines back on, and some are looking to take advantage of the opportunities in the market.

Impact of Social Distancing and Other Changes to the Deal Process

Below is a listing of some of the current changes experienced by those involved in the deal process as a result of COVID-19:

  • Deal origination is virtual, and it is important to take advantage of relationships built over time.
  • Use of technology has dramatically increased, specifically video conferencing to discuss important deal terms or perform due diligence.
  • As a result, there has been a lack of the natural interpersonal bonding between the buyer and seller.
  • Dealmakers still feel it is necessary to meet face-to-face at least once before a deal closes.
  • Continued uncertainty may make it difficult to fully understand the current impact of COVID-19.
  • The middle market will provide good opportunities for those PE firms with the infrastructure in place.
  • The lower middle market may see increased supply as owners look for exit opportunities.
  • There will be increases in creative deal terms, such as earn outs, to deal with valuation uncertainty.

Attendee Poll Questions & Responses

  1. Of the below what do you think the biggest constraint has been from Q2 to now in closing deals?
    1. Uncertainty in valuations 76%
    2. Inability to conduct in-person due diligence 8%
    3. Inability to receive financing 14%
    4. Cybersecurity concerns 2%
  2. What quarter do you expect deal activity to return to pre-COVID-19 levels?
    1. By the close of Q4 2020 20%
    2. By the close of Q2 2021 39%
    3. By the close of Q4 2021 23%
    4. By the close of Q2 2022 10%
    5. By the close of Q4 2022 3%
    6. 2023 or beyond 5%
  3. To what extent do you agree with the following statement: “I have been able to conduct due diligence on deals to a satisfactory level during the pandemic.”
    1. Strongly agree 7%
    2. Agree 63%
    3. Disagree 26%
    4. Strongly disagree 4%
  4. Which of the below sectors do you think will present the biggest opportunity for investors in the six months following the end of the pandemic?
    1. Health Care 17%
    2. Technology 37%
    3. Real Estate 29%
    4. Energy 5%
    5. Travel and Hospitality 10%
    6. Retail 0%
    7. Food and Beverage 2%

The complete webcast can be accessed here.

About Alan Wink

Mr. Wink assists clients with capital budgeting, capital structuring and capital sourcing. He has worked with many tech and life science companies on developing the appropriate capital structure for their position in the business life cycle.