It’s no longer business as usual amidst the COVID-19 pandemic, and that extends to mergers and acquisitions (M&A). Companies that were considering inorganic growth previously may be unsure how to move forward now, as the situation continues to evolve and the future remains uncertain.
According to a recent Bloomberg Law analysis, the M&A market has contracted significantly since the start of 2020. The year-to-date dollar deal volume for the middle and large markets is down 30% compared to the same period last year, while mega ($10 billion-plus) deal volume is down a staggering 67%.
Analysts predict that private equity firms will command a larger portion of M&A deals this year as they inject equity into ailing companies while taking advantage of low valuations, either through additional stake purchases or management buyouts. So far this year, $4.2 billion in management buyouts have been announced, compared to $2.4 billion in the same period last year, according to Bloomberg Law. Additional stake purchases are also up and currently total $141 billion, compared to $136 million in the same period last year. Given the lower total M&A deal volume, additional stake purchases now represent a larger portion of the market: roughly 17% compared to 10% last year.
The Bloomberg analysis shows that businesses have also started to terminate in-progress deals at alarming rates, with companies terminating 66 mergers and acquisitions since mid-March. That is more than January and February combined. These terminations may be temporary, however, as it is also becoming more common for businesses to exclude diseases or epidemics from their material adverse effect (MAE) provisions, thereby keeping prospective buyers on the hook.
To gain a better understanding of how companies should approach M&A in the current environment, we turned to our Transaction Advisory Services team. They shared that it’s more important than ever for a company’s senior leadership team to step back and ask themselves key questions to ensure a deal is in the company’s best long-term interest. Those questions center around financial, tax, valuation and profitability considerations.
The key is for buyers to gain a deep understanding of the degree to which COVID-19 has adversely affected and will continue to affect the seller’s business, including financial condition, customers, suppliers, workforce, and business prospects, prior to entering into a letter of intent.
If businesses are extra diligent about evaluating all angles, eliminating a product line or geography through a merger or acquisition may be a good way for a company that has recently experienced losses to ensure long-term success. And for companies in the industries that are experiencing unprecedented demand during COVID-19, a merger or acquisition can be an opportunity to strengthen the supply chain or move into new products or geographies that may have already been on the strategic plan. With the changes in market conditions due to the virus, prospect companies may be currently valued at bargain prices.