Mergers and Acquisitions (M&A) Activity Picking Up as Buyers Gain Comfort with Coronavirus

Merger and acquisition (M&A) activity, nearly halted during the first half of 2020, is accelerating in Q3 as business buyers and sellers start to gain comfort with various coronavirus-related uncertainties. This is good news for owners contemplating a sale in advance of expected capital gain tax rate increases if Democrats win the November election.   

During the first six months of 2020, we experienced a massive drop in overall M&A activity in the United States, while global M&A activity tumbled to its lowest level in more than a decade in Q2, according to data provider Refinitiv. Executives pushed the pause button on acquisitions and divestitures to focus their efforts on protecting their businesses and employees in the wake of the coronavirus outbreak.

Total deal values announced in the first half of 2020 dropped 53% below the same time frame in 2019, resulting in the lowest half-yearly total since H1 2010. In Q2, when the extent of the pandemic became clearer, total M&A value dropped 69% – the lowest quarterly total on Mergermarket record (since 2006). Most of the decline was driven by the United States, where M&A plunged 85% from year-earlier levels as U.S. coronavirus cases surged.

Starting in July, we experienced a surge in buyer interest as executives and investors alike have become more emboldened to do deals that a few months earlier ceased almost entirely.  At Kaulkin Ginsberg, we believe the worst might be over for business buyers and sellers contemplating a sale. Executives and their advisers are getting accustomed to negotiating and carrying out due diligence efforts digitally, albeit at a slower pace, as buyers look to turn over every stone to ensure they are identifying any hidden risks in advance of closing.

Employee safety has become top of mind for buyers and sellers alike. As a result, face-to-face meetings have been replaced with Zoom and Microsoft Teams meetings. While virtual data rooms have been commonplace for years, buyers still want to have live interactions with owners, managers, staff, and clients. Travel constraints are making onsite visits difficult to schedule.  Skeleton crews raise concerns about production decreasing.  Accounting and legal team are slower to deploy because companies are reluctant to incur costs until buyers are more comfortable about seller performance.

Financial buyers who amassed a war chest of cash before the pandemic set in are, once again, actively seeking to deploy capital. Adding to this, the cost of capital has dropped significantly which, under normal conditions, typically results in higher purchase prices and more cash transactions. However, determining the value of selling companies has become more difficult during the pandemic. Acquirers are trying to determine whether revenue increases during coronavirus are short lived or sustainable. Financial advisors are also trying to determine how best to account for the selling company’s costs associated with the pandemic, including the cost for developing work from home solutions and disinfecting office space so essential employees have a safe place to work.  Buyers are also concerned about newly formed financial risks such as aging accounts receivable and whether sellers are slower to pay their bills to defer losses.

If you’d like to discuss any of these points, please contact Kaulkin Ginsberg at hq@kaulkin.com.

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