COVID Leads to Strategic Shifts in M&A Activity

Timing is everything in business deals. Success is all about choosing the right time to make an offer, the right time to accept an offer, the right time to wrap up due diligence, and proceed with a deal. COVID-19 has thrown off our timing. We need to release our pre-pandemic way of doing business and approach the rest of 2020 with a new strategy.

This summer, the Harvard Business Review M&A Leadership Council surveyed 50 c-level executives and senior corporate development leaders about their plans for the rest of the year. They focused on understanding anticipated 2020 deal volume, “deal-type” strategy, and challenges of mergers and acquisitions in the current environment.

Here are our key takeaways from their findings:

– More than half of respondents indicated a “temporary pause” of current deal activity to allow time to assess the market and recovery timeline. But that wasn’t the end of the story. Those who had late-stage deals were either expediting to a quick transaction closing or proceeding as planned pursuant to a successful renegotiation of valuation or terms.

– While most respondents plan to remain “on pause” or plan to have substantially reduced deal volume in the second half of 2020, a significant percentage (23 percent) reported that they expected no impact on deal volume or an “accelerated” deal volume during the remainder of 2020. These teams are working to take advantage of opportunistic targets or more attractive valuations brought about by the crisis.

– Those who plan to be active are changing up their deal-type objectives – continuing to do strategic revenue growth deals, but also considering buying distressed companies or targeting new solutions or segments to further diversify their future revenue mix. They also anticipate continued geographic expansion deals, cost takeout and consolidation deals, and “marriages of survival.”

– Valuation is tricky right now, but those who are actively looking for deals are trying to creatively bridge the valuation gap. For example, with respect to 2020 financial analysis, to what extent have core fundamentals, competitive pressure or other internal or external factors impacted the target’s precipitous drop in revenues and profits vs purely COVID related impacts? Should buyers accept certain “COVID add-backs” to the seller’s EBITDA? There are many new questions to ask and consider.

We believe that there will be opportunities for great deals in the second half of 2020. If you are considering buying or selling a business, contact us for a confidential discussion of possibilities appropriate to your specific situation.