Even before the pandemic made virtual business transactions a must, many aspects of private merger and acquisition deals were being managed electronically or on a virtual basis. From diligence to document negotiation to deal execution, electronic management is and has been possible. This trend has clearly accelerated out of necessity during the crisis and is likely to result in permanent changes in practice.
However, while virtual meetings may be effective for resolving deal parameters, there is likely to remain a preference for at least some physical meetings. For instance, parties want to take comfort on “softer” issues such as personal chemistry and cultural fit. This is important for management teams meeting buyers as well as buyers having the assurance of being able to visit key operational sites or assets.
The global pandemic has created unparalleled uncertainty for nearly all businesses. Many companies are unable to predict when and how businesses and consumers will resume buying their goods and services. This unpredictability has made it more difficult for dealmakers to use historical earnings to predict a company’s future earnings, and accordingly their valuation. As a result, the number of merger and acquisition transactions at the present time have been significantly impacted.
Nonetheless, a trickle of deals are getting done and still others are being pursued, although at a much slower pace than in 2019. Consider:
- Over the past seven days, 154 deals closed in the US & Canada;
- Last week, 169 deals closed, compared to approximately 100 deals closing per week during the height of the pandemic.
- Cash holdings of US public companies amounted to $2.5 trillion during the last reported quarter, up from $2 trillion at 2019 year-end
A few megadeals have led to reinvigorated activity in mergers and acquisitions throughout July and August. Some companies are looking to prepare for what might be coming, while others are completing deals that were paused due to the pandemic.
- Seven & i Holdings acquires Marathon Petroleum’s Speedway petrol stations for $21 billion
- Analog Devices acquires Maxim Integrated Products for $20 billion
- Siemens Healthineers acquires Varian Medical Systems for $16 billion
- Johnson & Johnson acquires Momenta Pharmaceuticals for $6.5 billion
- Clayton, Dubilier and Rice acquires White Cap, HD Supply’s construction & industrial business, for $2.9 billion
Considerations If You Are Contemplating Buying
With the current state of the economy, if you are considering acquisition in the next 6 to 12 months it is important to understand that negotiations will take longer. It’s no longer possible to “get everyone in the room” to get a deal agreed upon, which likely will slow the process.
Similarly, due diligence will take longer, and will include new issues to be addressed due to current limitations. In fact, the Department of Justice has asked firms involved in mergers and acquisitions to add 30 days to their deal timing agreements, and European competition regulators have suspended investigations of a number of proposed deals.
It is expected that third-party consents (such as from landlords, customers, and intellectual property licensors) will take longer to obtain, and there will be delays in obtaining any necessary antitrust or other regulatory approvals.
Considerations If You Are Planning To Sell
Buyers and their boards of directors are going to be much more cautious, and internal justifications for dealmaking in this environment will need to be more compelling if you are considering selling over the next 6-12 months.
Merger and acquisition agreement terms likely will take longer to negotiate as buyers will want to shift more closing risk and (where applicable) indemnity risk to sellers, and sellers will seek comfort that the persistence of the pandemic will not permit buyers to walk away from deals based on “buyer’s remorse.”
Buyers will have concerns about their ability to properly value a seller in this environment since valuations from comparable transactions, even those entered into very recently, will likely be no longer applicable. Also, buyers requiring financing will encounter delays resulting from the unsettled state of debt markets and available liquidity, and M&A lenders may seek closing conditions that are even more stringent than those sought by buyers, increasing closing risk for both buyers and sellers.
As a result of the turmoil and uncertainty stemming from the pandemic, employing experienced mergers and acquisitions professionals has become paramount. Funds are available and deals can be negotiated, it just takes the right delegates “at the table.”
This was prepared by WEALTHSTONE ADVISORS, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. For more information please visit:https://adviserinfo.sec.gov/ and search for our firm name. This is for informational purposes only. Past performance is not indicative of future results.