COVID Acquisition Strategies

Multiple studies have been done on the Great Recession which tell us that a company’s path to recovery after a downturn is shaped by the actions it takes before, during and after the crisis.  Firms that made significant acquisitions during the 2008 crisis outperformed those that did not.

The natural response to an economic downturn is to circle wagons and focus internally, which is what most companies have done. COVID uncertainty has caused a 50 – 60% decline in M&A activity in Q2 2020. However, retrenchment is not the only option.

There is one variable we know for certain:  COVID will end.

There are many theories on the timing, but it will end either by vaccination, medication or herd immunity. The company that can develop a long-term view and look past the current crisis may gain a first mover advantage over others who are still in defensive mode.

COVID M&A MARKET

The effect of COVID on the M&A market has been three-fold. We have seen a decline in deal volume, a decline in debt used in deals, yet no significant change to valuations.  Our expectation for the post-COVID market will be a return to a seller’s market due to supply and demand factors which have not changed.

On the demand side, there continues to be huge sums of money chasing deals. Investor dry powder is up to $1.48 trillion from $1.41 trillion in 2019.  Strategic buyers were flush with $4.0 trillion of cash at the end of 2019, some of which may have eroded, but most likely not in significant amounts. Banks also will emerge from their current tightness and return to a more favorable lending environment.

On the supply side, we still have too few quality companies at market.  However, there are a few upcoming factors that might ease this supply deficiency. First, depending on election results, we could see an early-term attack on the capital gains rates.  A rise in rates, or fear of rise in rates, will drive sellers to act sooner rather than later.  We also expect to see post-recession sellers who do not want to experience another cycle, which is similar to what we saw post-2008 recession.

OPPORTUNITIES

We see a number of attractive companies in the market now which could be good acquisition targets. There are some quality companies, but too few of them; and, if you can find them, they will need to be strategic as they will trade at very fair or premium prices.

Another great target is a GCBT (good company with bad timing). These companies invested heavily in equipment, processes, and people in 2018 and 2019 and were ready for a great 2020. Stretched a bit thin now, they are looking for solid partners and may not have been in the market sans COVID.

There are also Rainy-Day Friends, which is what you could be for them.  These are good companies who are holding their own through this downturn but are tired. The owners do not need to sell now but they would for the right offer and to the right buyer. We believe these companies are available at a fair price with some favorable structuring.

Finally, there has been an increase in distressed companies for sale which you could acquire at a bargain. We urge you to look at these for the strategic fit and resist a good deal that does not match your growth strategy.

These are unprecedented times, which allows the opportunity to be creative and demonstrate the flexibility and courage to move forward boldly ahead of your competition. We encourage you to look to your future post-COVID, do your homework and move quickly.  There is a relatively short M&A window open, that could narrow as the COVID crisis ends.

Taureau Group Overview

Taureau Group is an independent boutique investment bank providing merger and acquisition services to lower middle-market companies throughout the world. Principals of Taureau Group have successfully completed hundreds of M&A transactions for a wide array of clients in virtually every industry. Transactions typically involve closely-held and family-owned businesses, and private equity firms with transaction values ranging from $10 million to $150 million. Taureau Group combines the capabilities of large, bulge-bracket investment banks with the service and responsiveness of the middle-market.

Please contact any of our experienced M&A professionals here to discuss acquisition strategies or how COVID-19 may impact your M&A strategy.