As the overall economy starts to address both short- and long-term challenges from the COVID-19 pandemic, businesses may be starting to consider inorganic growth or exit plans again. There is no doubt that M&A activity looks different in the current environment and some of the process may look different for months to come as well. We discussed the state of the M&A market with representatives from the investment banking community, private equity firms, the private sector, and valuation providers to explore trends and where M&A activity may go from here. The following are some of the top takeaways from that discussion.
Where We Are in the M&A Market
Transaction volume took an immediate hit during the early weeks of the COVID-19 virus outbreak, particularly once the World Health Organization declared it a global pandemic. Many deals involving companies that were directly affected by COVID-19, such as organizations in the hospitality sector, were immediately put on hold. Early stage transactions were also almost universally paused, regardless of industry impact
Transaction volume is starting to come back in the third quarter. Companies are finding safer alternatives to in-person meetings and site visits, but we are not seeing a full return to pre-COVID activity just yet. Travel restrictions continue to dampen deal making, particularly for closing a transaction. The difficulty in capturing business values and forecasts during the disruption is also keeping some merger and acquisition (M&A) players sidelined as buyers and sellers grapple with what forecasts for the third and fourth quarters may look like given the duration of some of the pandemic’s more disruptive consequences.
Credit & Financing Availability
Similarly, the financial side of deal making experienced an immediate disruption during the outbreak of the pandemic in the U.S. In the immediate aftermath of the national emergency declaration, financing concentrated on distressed deals, structured equity, minority deals, and liquidity plays. Capital markets are entering a new phase now with strategic corporate buyers and sponsors looking for high quality add-ons to their operations. Even so, the majority of the deals being financed in the current market had started negotiations pre-pandemic.
Getting a Deal Done
How a deal gets completed looks very different in the current environment. Companies are finding new or different ways of deal making with video conference management presentations and drone-powered site visits.
In addition to the logistics of getting individuals together in a social distancing environment, buyers are doing more up-front due diligence into how much a target was affected by the COVID-19 pandemic. Market comparables are not as relevant now in this disrupted environment. These factors as well as the disruption to capital markets mean that deals occurring now are taking a little longer to close.
The uncertainty around business values, forecasts, and available financing are also leading to flexible deal structures and arrangements, such as eliminating financing contingencies. Strategic corporate buyers and sponsors are still motivated to make the right investment and business owners may still be planning a market exit, so there may be more concessions each party is willing to make to get the deal done.
Final Thoughts
Deal activity is coming back and will continue to return as the COVID-19 environment stabilizes. The M&A sector does not anticipate supply to be an issue, but there will likely be more care and caution taken on deal selection in the months ahead.
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