How Deals are Getting Done During COVID-19
Updated: Dec 27, 2020
The economic impact of COVID-19 has changed M&A, but not in the way many expected at the onset of the pandemic.
Following a brief lull in second-quarter activity, dealmaking is back in full swing.
The dollar volume of global M&A jumped 80 percent to more than $1 trillion in the third quarter, according to Refinitiv, marking only the 11th time in the past 40 years that global deal volume surpassed $1 trillion during a quarter.
M&A activity has turned a corner as buyers and sellers, along with their advisors, attorneys, and accountants, have become accustomed to digitally oriented deal flow.
There’s long been an assumption that deal processes must always involve face-to-face meetings and culminate in a handshake.
For years, however, the industry had been adopting more digital tools and processes, and the pandemic has merely pushed the trend along and made digital optimization a prerequisite for success. In some cases, deals are being completed without buyers and sellers ever gathering in the same physical location.
Deals are being sourced digitally, video meetings and virtual data rooms are proving key to the due diligence process, and manufacturing plant tours are happening remotely.
When deal participants do convene in person, it is usually for socially distanced meetings that cannot be done remotely.
Aligning the expectations of buyers and sellers is challenging during periods of economic uncertainty, and especially during the COVID-19 pandemic when business operations are being disrupted by social distancing and government-mandated closures. That has made earnouts increasingly important in today’s environment.
Deals are still getting done, but we are seeing more structure in deals to account for a decline in 2020 performance. As the M&A market adjusts, deal activity is increasing to levels seen before COVID-19.
The wave of distressed deals that many expected to see in the lower middle market has yet to materialize, primarily due to government intervention. We believe distressed deal activity will pick up, although it may not be until early 2021. When that occurs, deal premiums will come down as some companies feel pressure to put assets up for sale.
Aggressive buyers should be leaning into the uncertainty and economic downturn. Evidence from the global financial crisis shows that "companies that made significant acquisitions during an economic downturn outperform those that did not,” according to the Harvard Business Review.
There will be a small window in which to capitalize on M&A as the COVID-19 crisis continues, and likely in the months that follow. Those with liquidity and risk tolerance to move quickly can find and complete deals at attractive multiples.
As companies evaluate their post-pandemic strategies, we are serving opportunistic strategic buyers and well-funded private equity buyers in their growth through acquisition.
Reach us anytime with questions about navigating this digitally driven—and still active—M&A environment.
Matthew Roberts is Vice President at Copper Run. He specializes in the business services, distribution, and manufacturing sectors.