How the Pandemic Has Affected Mergers & Acquisitions
As countries and cities around the world slowly begin to reopen, businesses are doing the same, and with that comes the curiosity of how the business landscape is changing, including how merging, selling or acquiring businesses will be different now than it once was.
On Tuesday, Worth and Deloitte Private held the first session of Thriving in the New Business Landscape, a three-part live online series offering insights from Deloitte Private professionals, entrepreneurs and business leaders as investors, privately owned businesses and families of worth look to reset into a “new normal.” In this first session, we were joined by Phil Colaco, CEO, Deloitte Corporate Finance LLC and global leader, Deloitte Corporate Finance Advisory; David Schamis, founding partner and chief investment officer, Atlas Merchant Capital; and Juliet Scott-Croxford, CEO, Worth, to examine the M&A trends and opportunities that have emerged for businesses in the short-, medium- and long-term, and to discuss how these trends will impact privately owned businesses and how those businesses can utilize these opportunities to not only recover but also thrive.
In the midst of this global pandemic, M&A has decreased in volume, according to Colaco, but overall, the act of buying and selling businesses has been pretty positive during this time.
“Where we are today is the markets are just starting to open up,” Colaco said. “I would say our clients in general have had a more positive than expected experience with their employees working virtually, they’ve had a more positive than expected engagement with their customers.”
But there are still some aspects that businesses are struggling with as we move into reopening and post-pandemic times.
“I think there’s still a lot of anxiety about supply chain,” Colaco continued. “There’s still a lot of anxiety about forecasting the remainder of 2020.”
According to Schamis, this pandemic has created an environment for some companies to thrive.
“Some businesses, frankly, are thriving in this environment,” Schamis said. “I don’t think anybody might have predicted it before. We all know that Google and Facebook are doing great because everyone’s sitting home in front of their computers, but we own three broker dealers—one in the U.S., two in Europe—they’re all doing great, way better than any budgets expected or anyone expected with 90-plus percent of their employees sitting at home every day.”
“The last crisis, it was sort of simple. It was bad for everybody. And it was just a question of ‘How bad was it for you?’ This crisis, it’s bad for some, it’s sort of neutral for others and it’s actually quite good for others, and you don’t feel great saying it’s quite good because it’s a terrible human crisis we’re going through right now,” Schamis added.
But the point holds that for some businesses, this pandemic has provided an opportunity to implement an offensive M&A strategy, whereas for others, it’s proven to be a pertinent time to implement a defensive one.
“The way we characterize it within Deloitte within our M&A group is there’s defensive M&A and there’s offensive M&A,” Colaco said, noting that defensive M&A is utilized in an effort to ensure the survival of your business.
“You are worried about liquidity. You’re worried about making payroll,” he continued. “Things are, I don’t want to say, ‘on fire,’ but things are getting drastic and you really don’t have any other choice and the best way to sustain your business or get some benefit and liquidity for it is an M&A process.”
And while there have been examples of defensive M&A strategies in industries like hospitality and oil and gas, Colaco has also seen businesses utilizing offensive M&A during the pandemic, too.
“It’s interesting, if you go back to the [2008 financial] crisis, if you look at people that made acquisitions in the two or three years after 2009, from a private equity perspective, their returns were dramatically better than people that didn’t,” Colaco said. “Shareholder dividends are being reduced. Shareholder buybacks are being reduced. If you have capital, interest rates are low, this is an incredible time to be an acquirer of businesses. I would argue this may be one of the greatest wealth creation opportunities of our lifetimes in the next 12 to 18 months.”
So, the question becomes who should be buying and selling during this time?
“As a seller, people are going to wonder why you’re selling now of all times. And if I’m a seller of something, I’m trying to think: ‘Is this really the best time to be selling?’ Schamis said. “As a buyer, you’re going to be skeptical as to why is this [person] selling right now? Is this really the best time? Are they that desperate? Maybe we can get a better price because of that, et cetera.”
“There are a lot of reasons that sellers sell, which are not just because of the absolute peak of multiples,” Colaco said. “If you are in what I’ll call a more distressed industry, I don’t think it’s necessarily time to sell, but if you’re in a business that’s performing well—and one of the adjectives we’re using right now is forecastable—we are finding that buyers at private equity groups are very focused on helping and working with our clients to figure out what does a forecast look like for the rest of this year and going into next year. And if you’re able to do that for your business in a credible way, you can still get a very, very high multiple for your business.”
And interestingly, there are a lot of buyers whose primary interest isn’t necessarily cashflow.
“A lot of buyers are buying businesses, not just for the cashflows, but for the quality of the management, the quality of the team, and I think that’s going to continue. And so I think, as seller, if you have a good team, really high quality people that are respected in their industry, are viewed as innovators, I think you could still get some really good interest from a potential buyer.”
View our first session of Thriving in the New Business Landscape below, and request an invite to the next session here.