Article written by:
Wade Kozich
Director of Transaction Advisory Services &
GBQ’s Chief Liaison to Footprint Capital

Last month, I was pleased to provide my thoughts in an article titled “Exploring the Deal World: What We Are Hearing and Seeing,” which described the immense pause being witnessed in the M&A world as businesses focused on COVID-19 and shoring up their balance sheets. The number of deals completed fell precipitously; the pause still continues, but there are signs that it is loosening.

As businesses reopen and start to move toward a new normal, I am confident we will see a significant upsurge in deal activity. Here is why.

The COVID-19 event has created some big winners, but has also left many that have not fared well. That environment will create a situation where you will begin to see a host of deals for a host of diverse reasons. Some of the 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 both 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 will turn to play offense.

On the other side, there will be many good, well-run companies that find themselves weakened by the downturn. It is likely they will determine that partnering with a strategic buyer or private equity (PE) firm is in their best interest because it will not only 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 will fall into a few categories:

  1. Companies that need to do something for financial reasons. They have a good business, but the downturn has sapped their balance sheets and even with PPP money, they have not been able to pull out fast enough. There is an existential threat to their business.
  2. 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 had not adopted new technology and found it very difficult to operate remotely during the shutdown.
  3. 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. Uber buying Grubhub would be a good example.
  4. 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 have left them exhausted and ready to finally do something.

The companies that will be saleable will need to have solid fundamentals and a good track record. Some companies will not survive this downturn. Those that were having problems even before COVID-19 who now find themselves in a desperate position are, unfortunately, not going to have many options.

I would also not assume that all deals will be priced lower in this environment, although that may be a general rule. One thing you learn quickly in the deal world is that everything is deal-specific. Many deals were called off in the last two months due to buyers wanting to significantly drop the price. Sellers simply agreed to call it off.

If you have a well-run company and it has survived 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 will be the fact that both strategic buyers and PE firms will have a pent up demand for deals as they have probably been working on securing their own companies or portfolio companies. They generally also have a high amount of cash to invest and they prefer investing in companies in a down economy for a lot of the same reasons mentioned previously.

Let’s also not forget that these record low interest rates will make 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 a link to our COVID-19 Resources webpage where you can find a number of articles and webinars available to you as you continue to strategize on 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.

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