“
Good entrepreneurs are like chameleons
” said Robert Herjavec, Shark Tank judge and successful entrepreneur; “
they change colors to adapt to different situations.
”
This skill will certainly be tested in the coming months. The Coronavirus situation is unlike past crises and when it comes to M&A, we will have to write the playbook as we go, without being able to rely too much on history to predict the future. Many macroeconomic factors are different this time and the IT industry in particular is in a different place. In contrast to the
Dotcom bust
of 2001, this crisis could be the beginning of an IT boost as technology will be at the center of significant changes in the way we work and live.
Current status
How did the current situation impact mergers & acquisitions so far?
The majority of deals that were expected to close in the coming weeks have been put on hold – some indefinitely.
Strategic buyers as well as Private Equity firms are:
- Focused on managing their business, adjusting their strategies and preserving the amount of cash they will need to weather the storm
- Reassessing valuations and deal terms of planned and future transactions based on the recent performance of their targets
- Aware that uncertainty and the associated risk is not a fertile ground for M&A
M&A strategies will change in the short and mid-term. Both buyers’ and sellers’ priorities and plans will have to be reevaluated.
What to expect?
Some fundamental M&A factors that drove market hyperactivity and high valuations over the last few years
did not change
:
- Consolidation will continue, driven by the need to achieve economies of scale and offer complete solutions to customers
- Large amounts of cash held by Private Equity and many strategic buyers are still available
- There is a growing number of retiring baby boomers
As far as buyers are concerned, we will see a modified landscape, with many buyers having new goals and objectives, resulting from the impact the crisis had on their business:
- Strategic and financial buyers will be motivated by the need to replace lost revenue
- They will endeavor to diversify, to accelerate growth in a certain geographic area, add a technology skill set or a vertical market, etc.
- More Private Equity groups will offer non-controlling / minority investment capabilities as a way to put their fund to work
- Some buyers – while motivated and with the necessary resources - will have a hard time justifying an acquisition any time soon if they had to lay off employees as a result of the crisis.
- Not unlike in the past, we will continue to see quality buyers, ready to pay a premium for a well-run business as well as buyers who are bottom feeders.
Despite the crisis, we continue to receive inquiries from buyers, especially private equity groups. A recent M&A survey conducted by E&Y showed promising results, with 73% of M&A executives expecting a near term recovery,
Most See Third Quarter Recovery
.
As for sellers, the overall number will be lower in the short to mid-term, because many owners of impacted businesses will opt to rebuild rather than accept a lower offer. As a result, sellers who are flexible will have more options.
Expect bifurcation when it comes to valuations: businesses that were minimally impacted (because of strong customer relationships, recurring revenue, sticky offerings, ability to be nimble, etc.) will command higher valuations; these businesses are now crisis-proof. Other businesses will struggle and will have valuations that in most cases will not justify a sale.
We will start to see again more deal terms and structures meant to mitigate the buyer’s risk. Depending on how long the aftermath will last, expect a rebirth of longer and more significant earnouts, seller notes or deals including buyer equity as part of total consideration.
What to do?
If you were planning an M&A event in the next 6 to 18 months you should revisit your plans – it might make sense to delay or accelerate them. Depending on the impact the crisis had on your business and your market, the ideal buyer – or seller, or transaction structure could be different from what you thought just a few weeks ago. Each situation is unique and one size fits all strategies and advice will not work.
Like with everything else, preparing for an exit requires a goal and a plan. When setting the goal, is it
a) to fetch a certain dollar amount when selling or
b) to sell at a certain point in time? Oftentimes, especially if valuation expectations are not realistic, both goals cannot be achieved concurrently, so a choice has to be made.
Factors to consider when updating the plan are: the 12 – 18 months forecast, growth rates, drop in profitability and path to recovery, revenue mix, potential cross selling opportunities, etc.
Ultimately the purchase price will be maximized by the fit between buyer and seller. Key questions we ask are: “How high is your opportunity funnel conversion rate? Why are you losing new business?” The answer will help identify the profile of buyers who would be able to eliminate or minimize that weakness. Buyers are looking for ways to improve a seller’s business and enable incremental growth, which is what the buyer is bringing to the table … other than money. It is a factor that will justify a higher purchase price.
