Taking It One Day at a Time: Mergers and Acquisitions Activity, Market Volatility, and COVID-19

April 2020

After years of solid mergers and acquisition activity, the Coronavirus and its associated economic impact upended 2020 expectations. Markets and the country’s current financial situation are fluid and changing day-to-day so we thought it might be helpful to provide a view of the activity we are seeing in the lower and middle-market as of Friday, April 3, 2020, and to offer some guidance during these unpredictable times.

Deal Flow

We have seen public, strategic buyers pause their deals indefinitely in response to share price sensitivity. Many public companies’ share prices vary greatly in the current unprecedented volatility – sometimes within the same trading day. And management of these companies is often reticent to pursue acquisition strategies in times of changing share prices. Likewise, some financial buyers are also putting deals on hold for months and are requesting extensions of letters of intent and exclusivity. Financial buyers, whose other investments may be struggling, are asking sellers to re-pitch or “defend” their companies or assets in the eleventh hour.

“We are seeing the same thing,” offered Mike Boedeker, an investment banker at CIBC Cleary Gull a Milwaukee, Wisconsin middle-market investment bank, “[w]e had a public strategic that was a perfect fit for one of our companies drop out despite our company’s great performance – almost no noticeable COVID-19 impact. The strategic’s share price had fallen too much. And financial buyers are asking for 60-day pauses.”

Like the middle-market, we’re observing a decrease in deal flow in the lower middle-market too, but advisors are confident the slip will be short-lived. Adam Webb, managing director at Quazar Business Brokerage, a Plymouth, Minnesota business brokerage specializing in advising companies with enterprise value greater than $1 million, said: “in speaking with a few SBA lenders, they are still making new loans if a deal makes sense and the business’s cash flow is strong enough to service new debt.” Webb has also noted that M&A activity in industries unaffected by COVID-19 seems to be moving along normally, maybe even hotter. “We are still being contacted by buyers who are very acquisitive in certain industries such as food and software,” Webb said.

As long as market volatility continues at historical levels, we anticipate strategic buyers will focus on inward improvement and buttressing existing efforts. In addition, we believe financial buyers will continue to employ their wait-and-see approach.

Takeaways for potential sellers

Webb believes that businesses able to survive the next few months may not suffer long-term damage. “While going to market in the next few weeks may not make sense for many businesses,” he said, “I do not think we are facing a recovery which will take many years as we saw in the last recession.”

If your company is about to go to market, focus on beefing-up explanations as to why supply-chains will not be disrupted by the virus. Explain the depth and breadth of your clientele and your clients’ customers. And focus on your business’ financial health. We’ve already seen one seller shorten its financial buyer’s “deal pause” from 60 to 30-days and likely resuscitate the deal by aggressively pushing updated financials and painting a picture of the company’s health to the buyer.

While future buyers will expect and understand a decrease in 2020 EBITDA and other financial markers, it is important to focus inward now to survive the tsunami of changes every company is facing on a daily basis. Survival is the key. Showing how your company and management team weathered the COVID-19 crisis will inevitably increase the value of your business. “For the last decade, private equity firms have asked sellers ‘how did you perform during the financial crisis?’ Now they’ll ask how a seller handled COVID-19 and how it is better prepared for the next time,” Boedeker said. “If I was a seller, I’d look to answer that question. The other thing I’d look for is a dynamic supply chain that isn’t solely sourced or overly reliant on Asia.”

Some other ideas for sellers right now include reaching out to their banks to see if more favorable terms are available and to determine whether they are eligible for any payroll, rent, or other expense relief under the loans available under the CARES Act’s Paycheck Protection Loan Program (see our article “Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to Provide Relief for Businesses to Keep Workers Paid and Employed” for more information). Refinancing debt can help offset slackening sales. Reach out to your landlord for rent deferment. Cut unnecessary costs. Review contract terms and force majeure provisions to determine ongoing obligations. Triage problems as they arise. Reevaluate talent and monitor productivity for a workforce that may be working remotely for the first time. Adjust as necessary and continue to invest in technology and tools that enable your company to operate under the “new normal” for a longer period. As Webb put it, “business owners contemplating a transition should largely do the same thing as a couple of months ago: start succession planning early, consult knowledgeable professionals, and focus on maximizing the bottom line.”

Companies – whether or not pondering sale – should run the numbers and consider tapping into their lines of credit, expanding their credit lines, and exploring other loan options including eligibility to receive a loan under the Paycheck Protection Loan Program mentioned above. FMJ has been assisting clients to determine what they may be eligible to receive under the program and what portion may be forgiven. “Even if they don’t need the money right now, having that liquidity on hand could be critical in the coming months,” Boedeker explained. “In 2008 and 2009, banks pulled lines of credit, and sellers don’t want to risk that now,” Boedeker said Friday, “and if sellers don’t end up needing the cash, the few months of interest payments should be negligible.”

For companies that survive the present crises, future trailing EBITDA calculations and multiples will reflect the Coronavirus’s effects on the business but most analysts predict a quick correction following the crisis. While the M&A markets have slowed down, hunkering down and working now can preserve your eventual liquidity event. This too shall pass.

If you have questions about the volatility of the market or the above article, FMJ’s Mergers & Acquisitions attorneys are here to help. Please contact Heidi Carpenter at heidi.carpenter@fmjlaw.com or Rob Fafinski III at fafinskirobertIII@fmjlaw.com.