Much like the financial markets it mirrors, mergers and acquisitions activity has declined dramatically due to the far-reaching uncertainty caused by COVID-19.
While all business areas are affected by COVID-19, industries that have been hit the hardest include: the airlines, automakers, oil and gas, retail, casinos and entertainment.
Conversely, industries such as direct-to-consumer distribution, medical cleaning technology, remote work software and even cannabis-related businesses could profit.
An unpredictable business environment that includes a non-uniform government response, stay-at-home work policies and social distancing make M&A deals especially difficult to negotiate and push forward today, explains Tyler Savage of Nixon Peabody LLP’s M&A and Corporate Transactions Group.
Companies are like people, says Brighton Securities Chairman George Conboy, whose firm serves as an M&A advisor to smaller business size buyers and sellers. A couple may be looking at a house, a car or some other high-price item but if the terms of the deal or their income changes, the likelihood that they are going to go ahead with that purchase is not very high, he explains.
Lender banks don’t want to finance purchases either and stop lending. “It’s hard to get financing now because everyone wants to sit on their cash,” Conboy says. “Everything slows down because of that.”
Conboy said a banker-tennis partner of his told him a business would be hard pressed to get approval on a line of credit in this economic environment.
After a robust 2019, M&A activity was a little slow in 2020 even before COVID-19 hit. “Right now, I think it’s (mergers and acquisitions) the furthest thing from a business owner’s mind,” says Vincent Leo, a CPA with Insero & Co. LLP “I think we’re in unprecedented times right now. You can’t make interest rates lower than zero.”
The market, including M&A activity, has another hurdle coming up that will either succeed or blend with the COVID-19 crisis. It’s the presidential election in November, which could produce new legislation, a new regulatory environment, new tax rates and a new business climate that greatly affects the market which doesn’t like uncertainty, Leo warns.
Besides the importance of price and share value numbers that go into M&A, an important aspect of M&A deals is still physical face-to-face interaction between the parties involved and COVID-19 precautions prohibit that from happening today, and possibly for some time to come.
For M&A activity to get back up, Savage says major investors and private equity companies need clear information on the scale of the epidemic.
“They want to see major intervention in the market and unlimited support from the government. That message isn’t clear right now or as consistent as it needs to be. The importance of different levels of government and the private sector of being able to work together without missteps is a big factor in the recovery process. There isn’t a consistent across the board message yet,” Savage says.
Savage was working in New York City on 9/11/01 and in Rochester for the 2008 financial crisis but sees this economic threat as potentially more serious than its predecessors. “We came out of it then. We’re resilient as a country but this feels different. It’s not a flaw in our economic system. The fundamentals of our economy are there and haven’t changed. This is something we haven’t dealt with.”
The fact that it’s affected the entire world and virtually every economy and business makes it worse than anything the U.S. economy has had to weather in recent times.
“We learn something every time but not something that will prevent the next downturn,” Conboy says. “Generals learn how to fight in a war but not how to fight in the next one.”
An important aspect of an acquisition decision is knowing what the company being acquired can do in the future: how it complements the buyer, how it brings a bigger market share and/or market expansion and increased buying power, Leo explains. “An acquisition is forward looking. You’re buying a business based on future revenue,” he says, but that determination is more difficult now.
Another reason for the delay in M&A activity in the COVID-19 business climate comes from the federal government as it tries to operate with work environment limitations.
In mid-March the Department of Justice announced there would be a 30-day delay in addition to the typical three- to six-month due diligence process for it to review mergers in their final stages.
That delay in approval could affect M&A activity, too. Even without the delay in approval, the DOJ along with the Federal Trade Commission can block proposed mergers and acquisitions or add additional requirements of its own.
Some deals will close
Predicting when the economic slide stops and the recovery begins seems difficult now, but as Conboy says, the U.S. economy is a resilient organism that always comes back and will come back now as long as people keep paying their utility bills, getting gas and going to Wegmans.
Despite the market conditions, many M&A deals that are close to completion will still go through.
“Most will close, some may not and the greater the proportion of stock in the deal, the greater the chance that deal may not close,” says Conboy.
That’s because the spread between agreed-upon deal prices and subsequent trading in the stock of the acquisition target has changed considerably and will most likely be re-assessed and examined by the parties involved.
Savage says his firm is seeing well-developed deals that are far along in the process still getting done today. Deals that are not as ripe or still in the early marketing stages are not.
Exactly how many M&A deals fell through isn’t known yet and may never be known depending upon how far along they were when COVID-19 hit the global economy. Deals in the early to mid stages of the process aren’t typically announced.
A notable acquisition that isn’t moving forward for now at least is Xerox’s attempted purchase of Hewlett Packard. In a March 13 statement, the company said the reason for postponement wasn’t the change in share price but because it needed to prioritize the health of its employees and customers above acquiring HP.
Todd Etshman is a Rochester-area freelance writer.