Reminder: M&A Markets are a LAGGING indicator

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The impacts of COVID-19 on the merger market are going to emerge behind what we're already seeing in the public markets, and the the full negative impact has not even come close to manifesting.

PE shops are hunkering down for the next ~6 months. Their portfolio companies are saddled with debt that they may be unable to pay, and sitting in credit markets with rapidly diminishing investor appetite. Strategics are doing the same thing and still just assessing where they fall on the spectrum of 'screwed' to 'extremely screwed'.

The likelihood of this being the single worst economic period for merger activity is far greater than 0%. I am at a prevalent boutique and just received word my pay is being reduced, candidly I would be surprised if the news gets better soon (within a month) and we're able to avoid lay-offs.

The deals that are going to get done in this period are either post-LOI or the opportunistic types that rarely have advisor involvement.

Outside of the opportunistic or necessity-driven deals where a banker is less likely to be involved (or to add value), why on earth would you buy a company right now? Why on earth would you sell yours?

Comments (19)

 
Mar 23, 2020 - 2:10pm

I'm just an intern at an opportunistic fund so take this with a pinch of salt but this is making management realise that they need to deploy capital (provided reserves are kept intact for liquidity purposes) to capitalise on some of the discounts being applied due to COVID. With that said, they seem quite hesitant navigating through deals right now given the unprecedented nature of what is going on in addition to making sure that none of our operating companies go bust taking a lot of their time.

To add to your point though, we did have a deal put on hold due to the buyer second guessing their purchase as the process started well before COVID and with that in the picture the valuation being impacted. I do think there are some funds, at the very least, with capital to deploy looking for the right opportunity from what i've been hearing/seeing.

 
Most Helpful
Mar 23, 2020 - 2:54pm
  • Why would you buy? - You could pick up divisions of publicly traded companies for pennies on the dollar. Find the publicly traded companies that need cash. Call corp. dev. about divestitures. Offer to close in 30 days and use rep. & warranty insurance. Publicly traded companies are notorious for having orphaned divisions that they will virtually give away because they are viewed as a liability.

  • Why would you sell? - Imagine you are 65-75 year old business owner. No one knows where the bottom of the market is and your 401k is shitting the bed. You have had a 10+ year bull run. Do you want to sell now, albeit at a lower value, or wait indefinitely (2yrs, 5yrs, more?)? You also wonder if you could even sell your business in the next 12+ months. I think a lot of business owners are still willing to sell due to the fear of the unknown. Fear is a hell of a marketer.

 
Mar 23, 2020 - 3:03pm

There are a number of reasons why both the scenarios you outlined are highly unlikely, but, putting those aside, even if they did happen both of those situations are the types of transactions where it's unlikely an advisor would be heavily involved. Which, given this is an investment banking forum, is exactly my point.

IBs are going to have a very lean Q2/Q3 at a minimum right now.

 
Mar 25, 2020 - 12:30pm

If you have a good business, there's no way you can look yourself in the mirror and justify selling for a significantly lower multiple than you could get a month ago. All of the processes for good companies are getting pulled. In order to take advantage of this dislocation, you need someone to sell and no one is doing that yet. Hopefully they will.

Yeah, the shitty companies are probably still up for grabs at maybe lower prices at this point. Seems like a questionable decision to buy garbage when no one can even give you a guess at their 2020 forecast.

PS. No business owner that would be of interest to institutional PE is worried about their 401(k). Hopefully, they are worried about their employees' though

 
Mar 25, 2020 - 12:37pm

My point exactly, if you're ~65 and have a quality business you have seen highs and lows and likely had multiple opportunities to exit. Why would you suddenly get scared now and take the lowest valuation levels you've ever seen?

Any smart operator, and you'd have to be one to have a decent business, would hold-off on doing anything right now - outside of the rarer circumstances.

 
  • Prospect in IB-M&A
Mar 23, 2020 - 6:35pm

Are you at an industry specific boutique or does your bank have multiple different groups? Curious if some sectors are getting hit harder than others

 
  • Incoming Analyst in IB - Gen
Mar 24, 2020 - 10:03am

Wow man go crawl under a rock because you seem like a scared little bitch. There are companies that sit on massive piles of cash that will vacuum this market up at ridiculous discounts. Sorry your boutique is fucked but thats what happens when you work with smaller firms. Better luck next time

 
Mar 25, 2020 - 12:34pm

Yeah cause consumer spending going in the toilet and a recession imminent...better spend that cash on other companies doing even shittier instead of keeping it.

Why don't you take a look at M&A activity during the last recession, or the one before that. Cash-rich companies still existed then FYI.

I guess it makes me a fear-mongerer, but I believe there's a very real chance 2020 could see the lowest level of M&A activity in the last couple decades.

 
Mar 27, 2020 - 1:33pm
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