M&A In The Age of Covid-19: FAQs (Part 2)

Since the start of the outbreak in March 2020, Hampleton Partners has provided tech business owners with regular webinar updates regarding M&A prospects in the age of Covid-19.

In this blogpost, we have compiled some of the questions frequently asked in our webinars.

In some cases, companies are exceeding their forecast, while others are seeing reduced growth because it’s difficult to win new customers – particularly in the enterprise environment. New sales are impacted. Transactions might be delayed. Go along with the original forecast and amend it as new data comes in.

W&I Insurances in transactions provides some comfort to sellers as they reduce the holdback and escrow portions of the purchase price, as the insurance company steps in if the buyer experiences any quality or damage issues in the company. These insurances have been increasingly popular in the last couple of years, including for smaller deals.

The pandemic may mean buyers will want to add further guarantees or clauses to try and mitigate the risk or provide some risk-sharing. A W&I insurance will reflect this and probably be more expensive. In smaller deals, a W&I insurance may not be possible as insurance companies may deem this an unattractive opportunity.

Given how the pandemic has unfolded in the US, this is hard to say. American strategic buyers are not as active in Europe as they were in the past few years. Since US buyers were always prone to more aggressive valuations in deals, this could affect valuations.

Yes and no. If you show solid performance this year, you will appear as a solid asset to strategic and financial investors. But they’ll also be asking: how sustainable is that performance? How will the economy shift long-term? 

Investors will try to compensate for this risk. They will ask you to show that the rise in profit will appear again and again, and compensate you for this with a solid earnout. If you believe in the long-term potential of your company, you should take that deal because it might afford you some money over time. However, always keep in mind in a transaction that is settled all cash at the time of when you close the deal, is much easier than negotiating an earn-out that might take two or three years’ time to be paid out fully.

Deal structures will change a lot depending on whether you transact with a strategic or financial buyer, especially in terms of earn-outs. For instance, strategics might avoid earn-outs, while financial buyers are less against them.

Moreover, risk-sharing might involve the traditional earn-out. It might involve a different deal structure where you buy shares over time and not invest in a majority right away. It might involve the semantics of your contract, where a buyer tries to protect more extensively against material adverse changes (e.g. if your supply chain breaks down, or if your business is shut down by the government).

Sometimes, buyers agree to keep the same valuation multiple but might base this on past rather than future performance. 

These are various coping mechanisms.

However, if the clauses are correctly structured, they can also be an advantage for the seller if the company later beats expectations. 

There is probably a greater likelihood of investors or buyers asking for some contingent programme or longer-term payments for the purchase – particularly if you serve a sector with a lot of uncertainty, perhaps serving the autotech or hospitality industries.

If you can show solid growth that has only been minorly affected by Covid-19 (for example, coronavirus has made your growth flat), you will need to be willing to accept some creative structuring which may include some earn-outs, for instance.

Our legal counsel counterparts have certainly pointed to more conversation around material adverse clauses, and there could also be more escrows and risk aversion. In general, the first or two years after a crisis, it is a bit more of a buyers’ market with regard to risk allocation, while the past five years have been more of a sellers’ market.

Contact Hampleton Partners for a confidential conversation regarding any of your merger and acquisition or corporate finance needs with one of our Directors or Sector Principals: https://www.hampletonpartners.com/contact/.

Hampleton Partners is at the forefront of international mergers and acquisitions and corporate finance advisory for companies with technology at their core. Hampleton’s experienced deal makers have built, bought and sold over 100 fast-growing tech businesses and provide hands-on expertise and unrivalled advice to tech entrepreneurs and companies which are looking to accelerate growth and maximise value.

With offices in London, Frankfurt, Stockholm and San Francisco, Hampleton offers a global perspective with sector expertise in: Artificial Intelligence, Autotech, Cybersecurity, Digital Commerce, Enterprise Software, Fintech, Healthtech, HR Tech, Insurtech and IT & Business Services. 

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