The M&A Market Post-Covid 19

Where are we now?

Between December 2019 and early March 2020 the FTSE 100 hovered around 7500 points and threatened to reach the all time highs of 2018.  Confidence was returning to the economy as some positive strides were being made towards a clear Brexit timetable.

Whilst M&A advisors were working towards an upsurge in deal activity, Covid-19 was making its way around the world at a rapid rate.  Very few appreciated how hard and fast it would impact the global economy.  On 23 March 2020, the FTSE 100 closed below 5000: a fall of over 30% in one month.

Concurrently, the vast majority of ongoing M&As has been abandoned or pushed right.  For the moment, corporates are internally focussed, private equity houses are nursing their portfolio companies through the current challenges, funders are busy deploying government support packages and M&A has currently been pushed down the agenda.

It is highly probable, perhaps inevitable, that most economies will experience a recession in 2020.  How long for one can only speculate.

What position are we in for M&A?

Many corporates have built up robust healthy balance sheets over the last decade. Whilst they are unlikely to be unscathed, they will have fire power for sensible M&As that create long term value.

There is plenty of dry powder remaining in the Private Equity and Family office world and whilst investment executives are likely to be assisting portfolio companies, there will be fresh capital to deploy for both portfolio companies and fresh investments.

Mainstream banks are likely to have resource issues dealing with the significant inflow of requests for funding from existing customers and any leverage for new deals is likely to be at very modest gearing levels.

Private debt/debt funds have been an increasing theme in the last few years in sponsored and unsponsored deals and no doubt fresh capital will be immobilised to take advantage of the market conditions.

What about valuation?

It is likely that capital markets will remain low and M&A activity at lower levels than recent history due to less access to the capital markets and a likely lack of availability for leverage, impacting valuations and ability to trade.

That said, historically, a lot of successful acquisition M&A has happened in lower valuation environments.

This is not just due to values being lower but because more planning is likely to be necessary at the outset of an acquisition to ensure it fits the required strategic rationale, the process may be less auction orientated and have more early engagement between parties (corporate and PE) to ensure there is an alignment of goals and the post-acquisition integration is likely to be handled in a less frenetic environment with the full benefit of synergies being experienced in an upturn.

Opportunities will undoubtedly emerge for well thought out, strategic, value-enhancing M&As in late 2020/2021.

What are some of the key things entrepreneurs and senior executives need to consider?

  • Am I ready for M&A?  Is my balance sheet robust enough? Am I clear enough on the risks to my own business? Is my team ready and capable of M&A now?  Do I need to augment my balance sheet, team and experience with external capital and expertise? Could this accelerate my long term value creation plan?
  • Don’t assume you are going to create value; even if value is low, or markets are weak, this in itself is not a reason to make an acquisition. Ensure that the opportunity fits with your strategy.
  • Advisers/diligence:  use experienced financial, legal, taxation and commercial advisers who can challenge your strategy and assumptions; ensure the approach to a transaction is structured and use the less frenetic M&A environment to conduct thorough due diligence to ensure the assumptions you have in making the bid stand true.
  • Diversification:  whilst value may exist in your own sector, value may exist in non-core assets that you understand.
  • Supply chain:  there has been a huge supply chain shock.  Could M&A play a part in securing your supply chain?
  • Alternatives to acquisitions:  in a market experiencing shock, could competitors look at mergers to survive and thrive; could strategic partnerships be entered into with your supply chain to ensure continuity of supply and mitigate credit concerns?

Finally, what are key things to consider at a time when the world has slowed down?

  • Prepare:  get your own organisation in order.  Ensure that the right people are in the right place and, if any M&A is on the agenda, ask yourself: What, Who and Why. Whilst opportunities for deals may not be in the near term, they could emerge very soon.
  • Finances:  have your own financial model and scenarios ready, define acquisition criteria and if you need/want external capital to support acquisitions, engage early with a clear plan.
  • Don’t panic – if your business is under pressure or in need of capital to survive or make acquisitions, it may not be the time to sell non-core assets.  Look at your plan, speak to your advisors and consider the government tools and timing of sales and acquisitions to achieve longer term value.
  • Be brave and innovative – the world is changing.  Often you can stick to doing what you know but improvising, being brave and making informed, well thought out decisions with the right structures could let you get ahead of the curve when the market starts to grow.

As we all know, we are in an unprecedented global health and growing financial crisis. The answers to the questions on everyone’s minds are unclear.  Our first priority is to survive before we consider growth.  M&A will move back up our agendas and will assist in preserving and creating significant value in the months and years ahead.