We are now two weeks into May and some states are opening up for business. Some more trepidatious than others, but at least we are seeing movement and finally getting better optics on the impact on our businesses.
But, we have a long way to go until we have a clear view as to the full impact and what our new business landscape will look like. What we do know, however, is our economy has been shaken to its core and we will be forever changed.
So, what do we know about the merger and acquisition environment?
We’ve got a strong headwind and I’ll break it down into the 3 main stakeholders:
Sellers:
We have clients who were in due diligence and closing in on the end of their exit process and we have clients who were just starting the process. Those who were closing are on hold as investors reassess risk and future growth potential. Those at the beginning of the process are focused on increasing enterprise value and pivoting to respond to business in a post-Covid economy. Some of our clients are well-positioned and proceeding to get out now. There are sectors that are very active and our investors have capital to invest. Deals will get done. Our job is to help them decide what is the best decision for them today. Get creative and get the deal done now? Or hold and grow?
Buyers:
Private equity and family office groups have been doing triage as they assess the financial health of all of their platforms and make the decisions as to which investments will continue to perform, which need time and investment to salvage, and those that are lost. As updated financial information becomes available they will take action and begin to deploy capital. We are now busy revaluing companies and looking forward to a post-Covid environment. Never before have future projections been so important!
Public companies’ big deals are done for a while and we expect the larger companies to become more active in the middle market as they look to grow through an acquisition strategy. We also expect to see tremendous consolidation that will benefit middle market businesses.
Individual investors will be on the hunt for discounted deals. Seller beware – we don’t engage in those deals.
Capital:
The banks have been under enormous strain servicing the stimulus programs. Eventually when their heads come up for air they will begin the process of evaluating investment opportunities. New capital commitments to get deals done is going to take time as they assess risk and we are hoping this won’t be at the pace of a glacier.
Family office groups and private equity still have significant dry powder and they will begin to launch investment capital as soon as the dust settles.
Public companies historically use stock as currency and less debt in getting deals done. They have tremendous pressure to grow and as Peter Drucker said “it is cheaper, easier, and faster to grow through acquisition than to grow organically.”
At the end of the day you need to ask yourself:
“Is now the time to get out?
If so, “how do I do that successfully?”
“Do I have the stamina to survive another downturn?”
We are not out of the woods. At a minimum you need to have a contingency plan if the economy is again shuttered. It’s a real possibility.
