M&A In The Age of Covid-19: FAQs (Part 1)
Do you foresee a lasting impact on the M&A market for companies looking to sell in the long run?
Circumstances are still uncertain at present. If you are planning to go to market in two to three years’ time, it’s hard to say whether markets will have fully recovered in terms of valuations by then. One thing’s for sure, however: there will be an M&A market, as deals always find a way of happening. The more important question is whether valuations will hit the same astronomical levels we’ve seen across some sectors in the past few years – and for now, it’s too early to say.
What steps can I take now for an M&A process once the outbreak has withered?
You can start preparing now. There is no reason to “wait for this to be over”. Now that the worst has passed in terms of market crashes, you can prepare now on the basis of your 2020 financials and with a view to transacting in 2021.
In general, you should ensure you have enough cash, as sooner or later a buyer will inspect your books during a due diligence process. If you don’t have cash now, you should convince your investors to provide you with it, so that you can get comfortable in a position where you want but don’t need to sell.
If you are in conversations with advisors, this will help you go to market when you need to – that transition can be quick.
During Y2K [when people thought an issue with clocks and programming going into the year 2000 would cause electronics to fail and the world to end], we saw similar issues, with buyers pulling away due to the uncertainty. In retrospect, a number of those deals did eventually go through six months later and at much higher prices after both parties had “waited it out”.
Our key piece of advice would be to hunker down, run your business and try to relax. Transacting a further six or twelve months down the line is not a problem.
If you have no choice but to sell immediately, enter into negotiations and see what you can work out – perhaps adding a longer-term earnout to bridge any sort of valuation gap that might exist due to the circumstances.
How actively are buyers looking for new projects and how is this affecting the M&A market?
Here it is important to differentiate between strategic and financial buyers.
Strategic investors have been forced to take a step back, analyse their situation and figure out how to integrate digital themes. Either they are looking for the next acquisition that can help them adapt – although forking out a few dozen million for a digital target is difficult to justify if you have just furloughed 10,000 people and closed down plants or offices. Generally therefore they are looking inward, and if they do engage in M&A, they will more selective, not as prolific, and more careful with their bidding.
Conversely, financial buyers are very active, with a lot of dry powder. They must double or triple their funds within ten years or so for their investors, so they are continuously investing, even if their investment boards remain cautious. As a result, they may be more willing to look through more companies. Financial buyers may compete with each other over targets, which could lead to higher valuations in the long run. Digital models are well-positioned to deliver the returns on the money in the financial investors’ funds.
What is the outlook for earnouts?
Once you have found a good buyer or investor fit, the big corporate finance question is, “How much will I be receiving on the day I sign the purchase or investment agreement?”. The second question is, “How much will I be receiving the future depending on predetermined successes?”.
Buyers could, for instance, add a clause relative to sales, EBITDA or growth goals based on which you would receive an earnout. This might tell you a little about what they are willing to commit to, because no-one can predict exactly whether the growth or sales goal in question will be reached over the next 12 or 24 months. As such, earnouts might be difficult to establish or agree upon.