Merger and acquisition activity came to a screeching halt as the COVID-19 pandemic set in earlier in 2020. Potential buyers and sellers alike hunkered down to try to get through the public health crisis that had wide-ranging impacts on many businesses. Deals that were in motion in the first couple months of 2020 were put on hold or abandoned entirely. New deal activity essentially fell off a cliff.
Now as we head into Q4, the tide has appeared to turn, with acquisition activity picking up in the private and public markets. Although we have not seen a huge spike in deals, activity is on the rise. Some of the deals that were in process in January and February are coming back. However, they may look a bit different from a valuation and structure standpoint when compared to the original deal from early in 2020.
The following graph was prepared by BDO that shows the general trend in M&A in 2020 and provides some insights as to what is happening currently:
I take a look at some insights into the M&A market at this point in 2020 below:
- M&A activity is closely linked to the overall economy and outlook, and as such, will continue to be impacted as the pandemic continues to ebb and flow
- Sellers are concerned about the future and may be highly motivated to act now – are sellers more willing to sell for a lower valuation just to exit and gain liquidity?
- Deal structuring has changed – seller financing, continent consideration, earn outs, and equity incentives are being more common as valuation gaps need to be bridged in order to get a deal done
- Less cash as down payment, more risk shifted to seller holding the note
- Earn-out provisions that shift risk to the seller is evident as the purchase price is dependent upon future performance and may require participation of the sellers post-close
- Industries that were not impacted as drastically or saw growth due to COVID-19 are having a more robust M&A market
- Cash on the sideline as pent up demand for deals, specifically in the PE space is causing some of the uptick in deal activity
Based on the above points, as well as the uncertainty that continues to be prevalent in the market as we head into the end of the year, there are a number of considerations for sell-side businesses. It seems as though sellers need to position themselves in the light of potentially poor financial performance due to COVID-19. Are the fundamentals of the business impacted by COVID-19 and is it a temporary or permanent downturn? Are financials trending in the right direction? Are there new avenues to explore to drive future earnings stability and growth?
Although it is clear that deals are happening now after a long pause, considerations around valuation and deal structure are becoming increasingly important as risk is perceived differently than in a pre-pandemic economic environment. Whether you are on the buy-side or sell-side, some additional diligence will be required and a potentially volatile market across a number of industries will likely linger on for months or years to come.
If you are exploring a potential deal on the buy-side or sell-side, DKB’s valuation team can help with valuation and structuring considerations to get the optimal outcome for you and your business.