As COVID-19 continues to spread across the globe, companies and dealmakers are experiencing increased uncertainty posed by the pandemic. While the world of mergers and acquisitions has not been immune to the effects of the coronavirus outbreak, transactions are still being completed despite many challenges. We wanted to share our initial impressions of what we are seeing in the M&A industry as new deal dynamics are beginning to emerge.

M&A Industry Outlook

After a record of M&A activity in the last decade, the deal pipeline is slowing down as transaction participants are trying to assess the disruptions caused by the economic lockdown. COVID-19 has caused certain buyers and sellers to pause and rethink their options. Acquisitions are still being completed, mostly between Class A businesses facing similar economic conditions, and primarily within sectors that have not experienced significant disruption by the coronavirus and associated lockdowns. Companies that have been directly impacted, from industries such as tech, retail, or transportation, are primarily focused on preserving cash and, as a consequence, are mostly reconsidering new external investments. Many on-going deals have been put on hold or pushed back to the last two quarters of the year due to increased market uncertainty as well as valuation and financing concerns.

Private Equity Firms

Private equity buyers and investors are still showing a desire to continue doing deals and raising funds amid the economic turmoil. Also, private equity firms have record-sized amounts of cash on hand available to invest. The combination of having plenty of available cash and markets in free fall has created an opportunity for many investors looking to be opportunistic during this period of instability. Although the PE industry seems to be positioned relatively well, the pandemic has affected many aspects of private equity firms’ operations — from financing, conducting due-diligence, closing deals to fundraising in an environment that is extremely uncertain.

Obstacles

Accurate valuations and financing will likely be two of the biggest obstacles for PEs during this time. Sellers still want the price from before the health crisis, while buyers will understandably be pushing for discounts. With traditional banks forced to retreat, there is no debt available right now to finance acquisitions. Investors are forced to cover a larger share of the price, which, in turn, will lead to lower returns. That being said, non-bank debt providers are still looking to loan, but they charge higher interest rates than banks. 

For other PEs, channeling their funds to support existing investments is a top priority.  Once their portfolio companies are being taken care of, they will be open to new acquisitions.

It is important to remember that this time will pass. Some businesses will not survive, but for high-quality companies, the impact will wash out, and more buyers will see the pandemic as an opportunity, not a problem. Once the health crisis is under control, we expect to see a surge in M&A activity for both troubled, as well as solid businesses, as lower middle market business owners will place more focus on their exit options. We remain open and prepared to assist our clients and prospects as they navigate through these challenging times. If we can assist in any way, please feel free to contact us.