Caution Slows M&A Activity
At first blush, it might seem like mergers and acquisitions are charging full-speed ahead. There have been rumors about Uber and Grubhub merging, while Target is apparently looking to acquire same-day delivery service Deliv. Locally, Firefly Credit Union and Trustone Financial Federal Credit Union this month announced plans to merge. But behind the curtain, things have slowed down in response to the novel coronavirus pandemic.
This year started off with activity relatively consistent with last year, but then mid-March saw a delay in transactions and deals shut down, said Mark Williamson, an M&A attorney at Lathrop GPM and a corporate and business practice group leader.
“It was a matter of probably a week to two, that they all shut down,” he said. “This pandemic has had a more dramatic effect and immediate effect than I recall in the 2008 timeline, which seemed to be more of a gradual slowdown. This one, I would say there’s so much uncertainty and anxiety out there that people really put things on hold pretty quickly.”
The deals that have been going forward are taking more time, with enhanced due diligence.
“Now we’re looking at things that, candidly, nobody looked at before,” Williamson said. “There are transactions going forward but they’re much more challenging to do, just because of all of the new things that people are focused on that they hadn’t been focused on two months ago.”
People are also trying to amend existing purchase agreements or get out of them altogether due to the risk of buying and a lack of cash flow. But many deals may be made in things like stock, and may be contingent on clawback or earnout provisions, he said.
“We’re going to see more of our people doing transactions that don’t involve cash or as much cash,” Williamson said. “So, instead of getting paid cash they’re getting shares of the buyer company going forward. Those kinds of things are more immune from the financing markets, because you don’t need the cash for it. We’re also going to see more seller financing. The sellers are going to be taking on a greater percentage of the purchase price through a promissory note.”
Longer term, it may become a buyers’ market, as opposed to the sellers’ market it’s been for the last decade, he said.
“I think this pandemic will cause business owners to question whether or not they still want to own a business, just because of the uncertainties,” Williamson said.
The amount of distressed M&A activity is on the rise too, according to Doug Cullen, head of strategy and chief marketing officer for M&A software provider Datasite, formerly known as Merrill Corp.
Its platform has seen a global increase of distressed deals by 7 percent in the last six weeks. And as businesses experience more economic strain, this is likely to be a trend. But in the Midwest over the last nine weeks, the platform has seen mostly asset sales as opposed to distressed M&A.
But some industries are actually seeing an increase in activity, Cullen said. Transportation defense; industrial; life sciences and healthcare; and technology, media, and telecom deals are all seeing a trend upwards he said.
“The counterbalance is energy, mining, oil and gas, and real estate, are all down, relative to the previous 30 days,” he said.
Deals are also taking longer to close.
“A typical M&A deal has a finite starting point and a finite end point. And so one of the things that we saw in 2008-2009 is the period of time became more elongated,” Cullen said. “During that initial period of Covid, there was a fair amount of uncertainty in the overall system. So a lot of people that had commenced projects,hit a little bit of the pause button to try to understand what the dynamics were in the market.”
Datasite’s overall volume is down, too. Compared to last year, project volume on the platform for January was up 8 percent, 13 percent in February, but then down 2 percent in March, and down 20 percent in April, Cullen said.
“The market conditions are such that you want to be ready to be able to move in a variety of directions,” he said.