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The Covid-19 pandemic has significantly affected corporate buy and sell activity worldwide, with the first quarter of 2020 cited as being down 25% on 2019 with a further decrease thereafter. We have seen a number of companies delay or abandon deals entirely due to concerns over financial uncertainty.
Despite the initial impact of Covid-19, a myriad of opportunities have arisen, and as countries and indeed businesses start to re-open there should be an uplift in transactions. The negative effects that Covid-19 has had on various industries cannot be denied or ignored. However, certain businesses are thriving and will continue to be attractive acquisition targets. In addition, buyers with cash or readily available financing will have numerous opportunities to acquire distressed businesses and take advantage of those desperate to sell.
Several growth industries have benefitted from the pandemic. For example, technology has been one of the areas least impacted by Covid-19 and should be the quickest to recover. Technology providers enabling remote working and trading have seen a surge in demand, along with those industries that are able to provide technology-based services.
Telecommunications companies have experienced a boost in demand due to the lockdown and orders to work from home wherever possible, as well as the need for strong home connectivity.
Buyers are likely to be looking for growth opportunities and new investments in these and other growth areas in the aftermath of this crisis.
Businesses in distress
There is a common assumption that buy and sell activity will decline during these uncertain times, however transaction activity arising from acquisitions of distressed businesses will likely increase. It is an unfortunate consequence of Covid-19 that a number of businesses have been severely hit, which is likely to result in some of those being available for acquisition. Strategic buyers and investors will have opportunities to acquire distressed businesses through a regular sale process or through the Insolvency process. Industries that have been significantly affected by the pandemic, such as travel, leisure, transportation, restaurant, and oil and gas, should see an increase in transaction activity as buyers see strategic opportunities for “bargains”.
Buyers may similarly expect to see bargains on assets of distressed businesses, presenting strategic opportunities for buyers that may not have been available pre-Covid-19.
Unique opportunities may also arise from business owners who previously contemplated selling their business but were undecided pre-Covid-19. Now, having experienced the uncertainty created by the pandemic, some of these owners are willing and ready to sell.
The number of business owners at or nearing retirement age is significant and many will be feeling the urge to sell rather than continue trading in what is an uncertain economic environment. In previous downturns, business owners have often opted to focus on their business and wait for the M&A market to recover, however this pandemic has had such a widespread impact on businesses and their owners that many may simply decide that selling now is a better decision for them than waiting for valuations to return to pre-Covid-19 levels.
Businesses looking to sell should start preparing for a potential transaction now. Buyers will want to understand the overall economic impact of Covid-19 and any associated risks, which means increased due diligence efforts, focused on the impact of the pandemic on the target company’s operations.
Sellers may well be subject to a more thorough due diligence process with a focus on financing arrangements, liquidity, short and long term viability and risk of insolvency. Due diligence requests may include the status of credit lines, communications with customers and lenders, loan agreements, and other financial obligations. Buyers will want to know whether the target received any government funding and whether they were in compliance with the relevant requirements in obtaining such assistance.
Sellers may also expect due diligence requests to focus on how the pandemic affected its operations and how the seller responded to those disruptions or changes. The seller’s IT and infrastructure, communications and supply chains may also be areas of particular focus.
It will be critical for sellers to demonstrate how the pandemic has impacted their balance sheets, operations and trade and provide an assessment of the “new normal”. Having a comprehensive business plan and robust forecasts will help sellers assuage buyer fears about the new trading conditions.
While Covid-19 has caused a broad downturn in markets, it is likely to provide numerous strategic and unique opportunities for buyers and sellers. Companies in stronger financial positions than their competitors should evaluate these opportunities and consider whether an acquisition might further strengthen their long-term position. Sellers sitting on the fence should carefully assess their future trading position and the uncertainties facing their business and weigh up the benefits of “getting out now”.
HW Fisher Transaction Services has a dedicated team which can service all of your Transaction needs. We provide a comprehensive service to buyers and sellers, covering all aspect of transactions from valuation through due diligence and negotiation.
If you wish to discuss any aspect of a transaction, please contact us.