Article written by:
Director of Transaction Advisory Services &
GBQ’s Chief Liaison to Footprint Capital
In April 2020, I was pleased to provide my thoughts in an article titled “Exploring the Deal World: What We Are Hearing and Seeing,” that described the immense pause being witnessed in the M&A world as businesses focused on COVID-19 and shoring up their balance sheets. While the number of completed deals fell precipitously and paused for a couple of months, they slowly gained momentum in June and continue to gather steam.
In June, for example, our team completed the sale of an HVAC company to a Private Equity (PE) firm, and we were involved with the purchase of a solid quartz manufacturing company by a private team of buyers. In July, we completed an acquisition of the division of a cryogenics laboratory equipment solutions company, and we were engaged to seek an investor for a medium-sized Durable Medical Equipment (DME) company. Additionally, we have been engaged on buy-side searches as PE firms, in particular, continue to ramp up efforts. I am confident we will see this surge continue to gain momentum throughout the rest of this year and into 2021. Here is why:
Some companies that have fared well will look to make acquisitions to strengthen their positions; there will be large gains to be made by companies that can quickly adapt to the changing environment. They will want, and have, the opportunity to invest in companies that help them grow, diversify, add intellectual property and human resources, and/or expand geographically. In short, they are playing offense.
On the flip side, there are many good, well-run companies that are finding themselves weakened by the downturn. It many cases, these companies will determine that partnering with a strategic buyer or PE firm is in their best interest because not only will it provide needed capital, but add new management strength.
When it comes to deals, the theory that “2+2=8” will be more apparent than ever and mergers will result in even greater synergistic gains. In some cases, it may even mean survival.
I believe deals in this environment will fall into a few categories:
- Companies that need to do something for financial reasons. They have a good business, but the downturn has sapped their balance sheets. Even with PPP money, they have not been able to pull out fast enough. There is an existential threat to their business.
- Companies that have done “okay,” but the downturn has exposed weaknesses that can be best solved with new capital and new management input. Perhaps a company has not adopted new technology and finds it very difficult to operate remotely during the shutdown.
- Companies that have something unique to offer and are a great candidate for an acquisition by a PE firm or a strategic buyer. These companies will help the acquirer change more rapidly to meet the demands and requirements of the new world created by the virus.
- The typical Baby Boomer who has lasted through many ups and downs in the economy, but this pandemic has put them over the edge. The ongoing threat of COVID-19 and ever-changing business environment has left them exhausted and finally ready to do something.
The companies that are saleable will need to have solid fundamentals and a good track record. Unfortunately, some companies will not survive this downturn. Those that experienced problems prior to COVID-19, and now find themselves in a desperate position, are likely not going to have many options.
I would also not assume that deals would be priced lower in this environment, although that may be a general rule. On the contrary, we are actually seeing the prices of certain companies rising. One thing you learn quickly in the deal world is that everything is deal-specific. Many deals were called off because of COVID-19 due to buyers wanting significant price drops. Sellers simply agreed to call it off and wait for the storm to pass. If you have a well-run company and it is surviving the pandemic shutdown, will it be worth more or less than before the onset of COVID-19? I believe there is a strong chance it will be worth more because companies will pay more for a company that has proven it can perform well in this environment.
Another contributing factor to the higher deal activity is the fact that both strategic buyers and PE firms have a pent-up demand for deals as they had been focusing on securing their existing companies. They also have record amounts of dry powder to invest. Let us also not forget that these record low interest rates are making buying more affordable. A big difference between this event and the Great Recession is that the credit markets are flowing very well; this makes it easier to borrow and get deals done.
One thing we know for sure is that these are very different, interesting and ever-changing times. We are pleased to provide access to our COVID-19 Resources webpage where you can explore a number of articles and webinars as you continue to strategize on the next steps and keep current with the ever-changing conditions.
As the COVID-19 pandemic continues to present challenges and disruptions, GBQ’s commitment to empowering growth remains our top priority. Should you have questions about your situation and next steps, we are here to listen and assist.