The Situation
In the M&A market, while many buyers are still on the sidelines in order to further assess what the future will hold, M&A transactions are still closing. And while activity has slowed significantly, two recent surveys indicate that buyers remain positive about the long-term M&A transaction market: AM&AA’s M&A Access COVID-19 Q2 2020 Market Report* and Harvard Business Review’s (HBR) What M&A Looks Like During the Pandemic.* Let’s take a look at some of their findings and implications.
Approximately 50% of respondents in both surveys report that deals have been delayed or temporarily stopped. Respondents believe the impact of COVID-19 on the M&A market is severely to moderately negative, but that it will improve by the end of 2020 – with many conjecturing it will take 1-2 years for M&A activity to return to the levels seen just before the outbreak of COVID-19.
The Details
According to the AM&AA report:
- 54% of deals in process were negatively impacted during COVID-19 with 40% being suspended and 14% terminated.
- 60% of respondents reported one or more new deals since February, 2020.
- Of the 1,092 deals in the pipeline reported by respondents at the outbreak of the crisis, almost one-fifth were in Manufacturing.
- New deals since COVID-19 are focused in Manufacturing and Healthcare/Medical.
- The impact on deals in-process since the outbreak of COVID-19 varied by industry, as you can imagine with recreation, entertainment, events and hospitality taking the worst hits.
- Valuations have also dropped by about 14% on average and 17%-24% depending on the industry.
According to the HBR report:
- 51% of deal makers indicated a ‘temporary pause’ of current deal activity.
- 14% of respondents indicated they were at an immediate stop on ALL current deals.
- 12% of respondents said they were expediting late-stage deals to a quick transaction closing, and another 12% of respondents said they fully intend to proceed to deal closing pursuant to successful renegotiation of valuation or terms.
Key Takeaways
While there was a clear impact from COVID-19, there is still activity in the M&A market. The majority of buyers report they are still actively pursuing deal opportunities. Buyers are out there – albeit quietly –shopping. They’re looking for opportunistic M&A hotspots and to identify where new promising and innovative deals will be emerging.
Corporate buyers appear to be the most active in regard to the number of new deals and seem most likely to continue pursuing new deals. The HBR survey indicates they are broadening the scope of potential new deal-type objectives: “Skilled corporate acquirers are simultaneously shopping across multiple different strategic deal-types, with 49% indicating their intent to opportunistically buy distressed companies and 23% targeting entirely new, non-core technologies, solutions, or segments to further diversify future revenue mix.”
The Bottom Line
“Mergers and acquisitions are notoriously difficult in any environment and post-COVID, they may be even harder,” posits the HBR article. And, as we know, this year will be a slower year for deals, especially given the record-breaking numbers of deals over the last few years. And it’s more than likely that record-high business valuations we’ve seen will likely decrease to some degree.
Buyers are going to be more cautious and expand their due diligence of potential targets – specifically, notes the HBR article, given the added level of cyber risks associated with the increase in remote working. They’ll want to know how a business performed during this unprecedented time. How quickly they were able to rebound, rebuild, and resume growth? And owners will need to be ready with those answers.
Deals will still close. And, if you want to be among them, you need to prepare. While your exit window may be temporarily closed, you need to be ready when it opens again. Now is the time to rebuild your business – update outdated policies, revamp processes and procedures, uncover new ways to innovate, maximize efficiencies, and seize new opportunities – and position it for a successful exit when the economy rebounds.
*About M&A Access COVID-19 Market Report: The COVID-19 pandemic is rapidly changing the M&A market and doing so in profound ways. In response, the Alliance of M&A Advisors (AM&AA) launched a nation-wide survey of M&A professionals of all disciplines and compiled a detailed report with research partner DealWare that is now available to AM&AA members, respondents of the survey, as well as a condensed version for the broader M&A world. AM&AA was overwhelmed with the participation in this important first-ever effort to help guide the global M&A community through these challenging times. There were 590 total domestic respondents 37 international respondents from 20 countries.
About What M&A Looks Like During the Pandemic: To understand how companies are thinking about acquisitions right now, the M&A Leadership Council queried 50 C-level executives and senior corporate development leaders about their plans. Respondents included experienced domestic and global acquirers from a representative cross-section of industries including banking and financial services, software and technology, healthcare and pharmaceutical, and professional services, among others. Respondent company sizes were distributed across representative revenue segments including 25% greater than $5 billion, 20% each from $1–5 billion and $100 million–$1 billion respectively, while the remaining 35% had revenues from $10–100 million.
Questions were asked to assess the impact on: 1) current deals in process at the time the crisis hit, 2) anticipated 2020 deal volume, 3) top “deal-type” strategic objectives in the near future, 4) operational challenges of M&A during lockdown and shelter-in-place requirements, and 5) internal M&A capabilities.
