M&A in the Age of COVID-19
As a middle market investment bank focused on the business & information services, education, healthcare services and consumer growth industries, we thought it might be helpful to provide some perspective on what we are seeing regarding the M&A environment during the global pandemic.
Markets dislike uncertainty and uncertainty certainly abounds today. That said, with each passing day, it does appear that some of the “fog” is lifting, perhaps imperceptibly at first, and that a clearer picture emerges of what we are dealing with in regards to COVID-19 with respect to health, economic implications, and government interventions. M&A has absolutely and dramatically been impacted, though the landscape is best viewed by the sector and specific stage a deal exists.
For deals presently under LOI that are approaching closing, deals are still getting done, though typically not without some significant reworking of previously agreed-upon terms as buyers react to a fluid landscape as relates to credit markets, seller performance (present and projected) as well as buyer performance (in the case of strategic buyers). Given the significantly riskier environment, we are seeing increased reliance on rolled equity, earnouts, seller paper (oftentimes with a low interest rate) and other structural mechanisms that permit appropriate sharing of risk. In the coming months, we also expect to see more minority deals that perhaps serve as “plan B” for control deals encountering issues. Deals in the healthcare space (and those viewed as “essential”) and to a lesser degree, the technology space (and recognizing there’s crossover between the two) are, for the most part, continuing to forge ahead. From our perspective, strategic buyers (including those owned by PE) are really the only active acquirors at this moment, as PE firms looking at new platform investments have largely temporarily stepped aside given their focus on portfolio companies. Notwithstanding the aforementioned, we do expect to see PE resume activity fairly quickly, given, in particular, more than a trillion dollars in investable “dry powder” awaiting deployment. On the financing front, while credit markets have tightened a bit, leverage levels have decreased and downside scenario thresholds have increased. Leverage is still available, albeit on a more selective basis. Strategic buyers expanding an existing facility are certainly better positioned than buyers relying on a new lending relationship.
From a legal or contractual perspective, material adverse effect (“MAE”) clauses and the inclusion or exclusion of COVID-19-related language, covenants that provide flexibility for rapid changes in business practice due to COVID-19, and language speaking to automatic date extensions (perhaps due to regulatory authorities being backed up, understaffed and/or simply not physically open for business) are becoming integral.
Deals in other spaces (non-healthcare or non-tech), for the most part, are hitting the pause button and/or “slow rolling” ahead, with recognition from all parties involved that deal-term modifications may well be required in the future to adjust appropriately to changing situations.
For deals that are in the market and past management presentations, the story is much the same -continue to move forward but at a much more measured pace, recognizing that crucial due diligence is more difficult to achieve, if not impossible, given shelter in place, work from home and lack of travel throughout the economy.
For deals that are not yet in the market, work on the preparation front (e.g., drafting of marketing materials, assembly of data room) continues with the recognition that things need to settle down before a new deal is brought to market.
M&A activity will undoubtedly decline in the coming months, but we expect a resumption of activity, likely at lower volumes and valuations (though this will be sector dependent) to resume in the second half of the year, presuming COVID-19 is addressed from a medical perspective, and a normal (relative term) business environment returns. We expect to see companies that performed well through these uncertain times be the first back to market, and to be rewarded with premium valuations. Across our industry verticals and client base we are seeing strong performance thus far in direct to consumer (“DTC”) models broadly speaking, food & beverage, pets, online education, essential healthcare (particularly telemedicine) and certain technology plays (particularly those that focus on or support the aforementioned industries).
As a firm with a significant buyside practice, we would also expect to see a resumption of strong buyside-driven M&A, particularly by larger, well-capitalized firms.
During these uncertain times, MHT is committed to providing helpful information and strategic counsel to individuals and firms in need. We welcome further discussion:
Business & Information Services: Mike McGill (firstname.lastname@example.org) or Kevin Jolley (email@example.com)
Education: Shawn Terry (firstname.lastname@example.org) or Alex Hicks (email@example.com)
Healthcare Services: Taylor Curtis (firstname.lastname@example.org) or Alex Sauter (email@example.com)
Consumer Growth: Craig Lawson (firstname.lastname@example.org) or Patrick Crocker (email@example.com).