M&A Trends: Deal Outlook for 2020 and Beyond
In a roundtable hosted by Crain's Chicago Business, four experts were invited to discuss M&A trends for 2020.
This article first appeared in Crain’s Chicago Business; the Riveron responses are below.
Since 2020 began, COVID-19 has claimed numerous M&A deals. While others have moved forward—with delays or price adjustments—still others have proceeded as planned. As the fourth quarter approaches, the continuing pandemic and upcoming presidential election are adding further uncertainty to the deal process. Amidst this challenging environment, four Chicago-based M&A advisers shared their insights with Crain’s Content Studio.
“Nonverbal communication is a huge part of how we interact with one another; finding ways to conduct diligence and read body language will continue to be a challenge.”-John Iwanski
How is your organization involved with M&A, and what types of clients do you typically represent?
Riveron is a business advisory firm that delivers solutions throughout the transaction lifecycle. We partner with private equity firms, corporations and lenders to deliver integrated solutions and services for our clients. By blending financial, tax, IT and operational disciplines, our transaction approach creates a roadmap for identifying opportunities, assessing the environment and implementing effective strategies throughout the deal process to ensure our clients realize the greatest return on their investments.
What concerns are you hearing from clients regarding the impact of the COVID pandemic on the deal environment?
Our clients, like everyone else looking to make sense of today’s tumultuous environment, are curious to understand what the “new normal” looks like as we emerge from the most immediate challenges presented by the pandemic. When the crisis first began, many of our clients were concerned about liquidity and wanted to draw as much cash as they could. Now, with the initial shocks subsiding, they’re focused on making decisions that align with the acquisition strategy previously in place. Many are finding that the inability to conduct in-person meetings has complicated the deal process, especially when it comes to forging new relationships.
What sectors or industries have remained active?
Across all sectors, deals that were close to the finish line have continued, albeit at a slower pace, while most prospective transactions within “nonessential” industries have been stalled. There have been pockets of activity at companies that are not only recession-resistant but also happen to be performing relatively well despite the pandemic. Additionally, corporate carve-outs have seen a rise in activity as companies seek to monetize non-core assets and strengthen their balance sheets in the short term.
What impact have you seen on deal size?
According to FactSet data, the week of April 17 was the first time since 2004 without the announcement of a deal valued at more than $1 billion. There’s been a 75 percent decrease in year-over-year deals for transactions of this size. Fortunately, activity has since picked up. Nine of the 14 deals valued at more than $1 billion that have occurred during the pandemic were announced in June. Middle-market activity also began slowing down at the end of the first quarter and was down 16.5 percent from first quarter 2019. Activity is expected to rebound more quickly in this space, however, given the size and agility of many companies that operate within the middle market.
Do you see buying opportunities in the current environment?
Companies are more focused on their core products and/or service offerings, and are accelerating their transition to online commerce. As these dynamics change, new opportunities will undoubtedly emerge. Further, the current environment has resulted in fewer traditional auctions. Sellers are focused on fewer buyers with a higher likelihood of successful close, which has created less buyer competition in certain situations.
How has the global pandemic impacted due diligence procedures?
Nonverbal communication is a huge part of how we interact with one another; finding ways to conduct diligence and read body language will continue to be a challenge for third-party diligence providers. We’re also seeing considerable impact on operational diligence, given the huge blow to companies’ supply chains and other aspects of their operations. As companies assess the operational viability of a potential target, vendors and third-party customers are at risk of losing business, which has created a ripple effect.
How do you view M&A outlook for the remainder of 2020?
The next six to 12 months will be a volatile period for global M&A. While there’s expected to be an uptick in activity in the fourth quarter, the nature of the transactions will vary. Corporate carve-outs will remain active, distressed M&A will accelerate as sellers are faced with the economic realities of the current market conditions and value investors capitalize on the opportunities. Add-on activity will continue; smaller deals will likely be the first to return to pre-pandemic levels.
When do you expect to see an uptick in distressed M&A?
As consumer behavior continues to affect global supply and demand, many companies will find that their business models are no longer sustainable and they’re unable to weather the storm. The June 30 debt deadline resulted in a large amount of delinquent loans, and banks are now starting to increase their reserves for troubled debt. With each passing quarter, there will be new waves of distressed companies. This will likely continue until a COVID-19 vaccine is in market and consumers feel comfortable returning to business as usual.
What impact do you expect the presidential election to have on M&A?
People are beginning to monitor each candidate’s tax plans. Joe Biden expects to increase capital gains taxes while President Trump has yet to announce his formal plan. Stimulus plans resulting from the shutdown and resulting economic impact add another layer of complexity to the election discussion.
How will deals likely be financed going forward?
In addition to traditional valuation bridges—earnouts, seller financing, insurance and escrows—buyers are pursuing alternative structures to mitigate risk and uncertainty. There’s been an increase in nontraditional minority deals, which includes mezzanine, convertible debt and majority recapitulations. Due to the tight credit market, we’re seeing less stretching for value by lenders. For smaller deals, the Small Business Association has created more incentive for buyers by offering to pay the first six months of debt payments.
What advice are you offering clients considering a transaction in the near term?
Don’t waver from your existing acquisition strategy despite the current climate—stay true to what’s worked for you in the past. It’s too soon to know what will happen as the dust begins to settle. History has taught us that we can expect to return to some semblance of normal once the uncertainty decreases and the economy starts to stabilize. While we can’t expect a quick rebound and we’re still unsure what exactly the new normal will look like, we know that there will undoubtedly be deal opportunity there for those who take it.