COVID-19's Impact on M&A

COVID-19 has made a significant impact on M&A. What are the actual views and responses from executives, dealmakers and board members?

COVID-19's Impact on M&A

24 Jul
Toby Tester
Kevin Robbins
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COVID-19's Impact on M&A

COVID-19's Impact on M&A

How Have M&A Activity and Valuation Been Impacted Thus Far?

The immediate impacts of COVID-19 and the move to working from home, social distancing, and uncertain economic conditions were:

  1. Deals that were fairly far along in their life cycle and still made good business sense were allowed to close. For some, additional conditional clauses were utilized by practitioners to decrease any potential damage from deals that still wanted to close. 
  2. Companies began to review and perform triage with their current deal inventory. This meant that much of what companies had in their pipelines was quickly abandoned and pushed aside. 
  3. Some businesses began looking ahead at what could be picked up and consolidated as a result of COVID-19. 
  4. Other practitioners faced a total system-wide impact on M&A activity, basically abandoning M&A in any form.

How does the COVID-19 crisis compare to the 2008 economic crash?

If you listen to the news or read the newspaper, which is impossible not to do given our current state, today’s economic crisis is often related to, or mentioned in the same breath as, the 2008 crash.

However, expert practitioners unanimously agree that what we are facing now is much different than 2008 conditions, and, in fact, may be more similar to the resulting conditions after September 11, 2001, since the current COVID-19 crisis is causing a series of major societal shocks and traumas that will, in turn, have a major impact on demand as people pull back on spending.

Whenever there is a serious crisis, a financial one ultimately will follow. The 2008 economic crisis, however, was caused by negative market conditions that developed over a longer period of time than the current almost immediate negative impact of the COVID-19 global pandemic.

Furthermore, practitioners believe more long-lasting changes will come out of the present economic crisis versus the one of ‘08. Additionally, COVID-19 and its fallout affects everyone and each and every sector of the economy, which shapes the language around the current situation, recovery, planning, and funding - this is in stark contrast to 2008 when we saw, rightly and wrongly, the vilification of the financial services industry.

What changes will practitioners see as a direct result of COVID-19?

It is an understatement to say changes will stem from COVID-19. Practitioners agree a multitude of changes will take place, noting a shared agreement on the following:

  1. Re-evaluation of supply chains - The current supply chain impacts are astronomical; following this time, supply chains will focus more on strategic importance and resilience than cost. Moreover, supply chains will look to manufacturing locally, leveraging new technology such as AI and automation, which would allow them to proceed in times of crisis. Companies will realize they do not need to have such long supply chains, nor are they ultimately beneficial to any preparedness plans. 
  2. Increased collaboration and more meaningful business relationships - Once we emerge from the shock and anxiety of COVID-19 and its consequences, companies will look at how they collaborate to solve problems and succeed. An almost de-globalization will occur because companies will be asking themselves “who do we want to work with? Who has been paying me? Who has stuck with me through the crisis?” Relationships will undoubtedly matter more. In fact, practitioners believe these relationships might be fewer in number, but deeper in nature. Ultimately, there will be a reckoning of who your business friends are and how they can be more important than saving a little bit of money. 
  3. Focus on resilience - Building off the above sentiments, in the post-crisis world, companies will be less focused on becoming efficient and more focused on being agile and resilient to future global crises. 
  4. Rapid tech innovation - Monumental and rapid progress on innovative solutions to get the economy moving again will be seen from most sectors. However, travel will obviously be a sector of the economy that will face longer term effects and industry re-imaging.
  5. Habituation will influence work space (and tech tools) - In general, it takes 30 days to create a habit, and we are all operating at home for more than 30 days. All of these new work habits will not simply disappear from executive, employee, and practitioner behaviors when the crisis is over. The value of the technology used at home will be fully realized, as well as the pros and cons of working from home.

While habituation makes the technology (things such as Slack, DealRoom, Zoom) more valuable, it may result in companies feeling they need less of a physical footprint in terms of office space. There is a tug-of war relating to this possibility in industry since innovation requires keen human interaction and many people’s homes are not designed to be offices, but it raises predictions of a shrinking demand on office properties.

Adding to the complexity of these issues, landlords will obviously be hurt by lower occupancy rates, especially the ones already facing rent forgiveness as a result of COVID-19 - they will be faced with declining rental income twice.This reality could also spill over into other sectors of the economy such as construction as new building projects could be curtailed. 

How Can Companies Keep From Crashing and Burning?

Cliches are cliches for a reason since they are based on facts; the cliche “cash is king” is very relevant in this economic climate - right now, organizations need to keep cash coming in to survive. How do they do this? Looking at suppliers, landlords, and others to renegotiate terms is one way.

A second way is utilizing lines of credit. This does not mean, however, we should rely on tactics to hoard cash, such as continuous delayed payments; at the micro-level, these strategies are okay, but at a macro-level, they devastate the economy. Instead, once executives, practitioners, and consumers get through the shock and anxiety of COVID-19, they will need to look at how collaboration, especially business collaboration, can help solve problems, which should, ultimately, lead us toward more stable ground.

What is one thing companies should not do for cash, unless they absolutely have to? Sell assets. Now is not the time to sell assets, but rather it is the time to prepare. Divestitures are already complicated beasts, and many fail due to lack of preparation; therefore, now is the time to review assets and portfolios and prepare for selling. A deal should not be signed until we reach our normal or as many are saying our “new normal.”

What are Additional Impacts of COVID-19 on The Economy and M&A?

  1. Larger companies will scoop up start-ups in order to become more agile and resilient. 
  2. Retirement funds might also be looking at this time at buying opportunities because, similar to large companies, they are “cashed up.”
  3. Deeper due diligence will be required. For instance, are there lawsuits building because employees were infected at work? 
  4. COVID-19 clauses will be added to deals because there will be more contingencies related to the stimulus loans. These types of situations will make for more complicated and detailed work. Consequently, more legal help will be required. 
  5. We will see a period of low supply and high demand.
  6. As sectors of the economy come back, they will come back in waves.

special guests

Toby Tester
Senior Consultant & Project Manager at BTD
Kevin Robbins
Serial entrepreneur and federal market SME

Hosted by

Kison Patel

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