Crystal Cox/Business Insider
"In our new COVID-19 world, companies don't have to give up hope with regards to mergers and acquisitions or fundraising ambitions."
- Andrew Daniel is an investment banker at Digital Capital Advisors, LLC, a technology-focused global investment bank.
- Despite the coronavirus' impact on the economy, mergers and acquisitions will resume quickly when the crisis fades, he says.
- Companies are affected by the economic downturn differently, and founders and CEOs should adapt for future deals.
- Founders and CEOs should focus on executing, overcommunicating with their investors and boards, and identifying potential deal partners.
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In our new COVID-19 world, companies don't have to give up hope with regards to mergers and acquisitions or fundraising ambitions. The global economy is grinding to a halt and businesses of all sizes are increasingly affected by the new status quo, but M&A and fundraising are here to stay.
Although it's been a century since a pandemic has had such a global impact, the lesson learned from previous crises is that markets rebound and deal activity resumes once the macro environment stabilizes.
While total aggregate deal value will likely decrease significantly in 2020, mainly driven by mega-deals being put on hold, total deal volume will recover significantly in the second half of the year.
As strategic buyers and investors get accustomed to the new normal, and attentions turn away from short-term market reactions and crisis planning with portfolio companies back to generating long-term growth, now is the time for action among founders and CEOs, whether they are heavily negatively affected (revenue falling by 50% or more), slightly affected (revenue falling less than 25%), or growing. Each can take steps today to prepare themselves for future M&A and fundraising.
The key is visibility. In uncertain times like these, entrepreneurs must build credibility with buyers and investors - a hard ask in a time where visibility and clarity is limited. Those that can build familiarity and credibility for their plans during COVID-19 and afterwards will be best positioned to take advantage of M&A down the road.
Strategic buyers are taking varying approaches
Like companies, strategic buyers fall into the same categories. They're also impacted by their ownership status.
Public ones are mostly focused on share price, with many declining 30% or more. As such, they're often hesitant to pursue deals until the economy stabilizes and they're back on stable footing.
Private buyers don't have to worry as much about appeasing shareholders so they can return to M&A faster, particularly in a 0% interest rate environment.
For heavily affected buyers, revenue and share price declines, team safety, and customer retention are top priorities. They're planning for worst-case scenarios and ensuring that they have the cash to survive, and deals have mostly ground to a halt.
Slightly affected buyers are taking different approaches. Some are focusing internally, minimizing costs. Others, although with more scrutiny than before, are selectively evaluating opportunities that are highly additive and attractive.
Finally, buyers that are growing are eager to capitalize on an unprecedented opportunity with consumers at home and are actively looking at businesses that are also growing user bases, engagement, and revenues, even if valuations remain up for debate now.
Private equity has the advantage now
Private equity has experienced a significant change in a COVID-19 world. Six months ago, entrepreneurs had the advantage, leading to competitive processes and sharply increased valuations. Now, businesses are struggling to survive, making them prime acquisition and investment targets, and the advantage is with private equity.
Private equity firms are reminded in hindsight of elevated returns from 2008 and 2009 vintages, with some funds increasingly willing to run into the fire, trading revenue risk (due to a lack of visibility) for discounted valuations.
While some private equity funds continue to sit on the sidelines, deals will surge rapidly.
Venture capital is poised to return fast
Venture capital firms are taking stock of their portfolio companies and deciding which companies they'll give additional capital and which they won't.
Given the distraction and associated time of managing their portfolios during the crisis, venture capital firms will wait on new opportunities until their affairs are in order. For deals that were underway before COVID-19, some term sheets are being renegotiated. Expect venture capital dollars to lag in the near term but return back swiftly when the crisis ends.
How founders and CEOs can prepare for when M&A comes back
- Focus on executing. For those negatively affected, extending cash runway, retaining customers, and defending market position needs to be top priority. Those that are benefiting need to capitalize on the opportunity. You'll be judged for your ability to succeed in a favorable environment.
- Overcommunicate with your investors and board. As the pandemic continues, businesses will increasingly face cash challenges, and getting capital from investors may be the last resort. Keep them informed so they are not faced with a surprise capital need.
- Identify potential acquirers and investors. Deals will happen in 2020. Identify tier-one acquirers or investors now and develop specific theses for each one, because once clarity towards recovery comes, parties will act swiftly.
- The more information, the better. Give potential acquirers or investors plenty of information and data they need in high quality and easy to understand formats to build comfort for those that are evaluating it.
- Be top of mind when certainty returns. Building relationships and staying top of mind for investors and acquirers has never been more important or more difficult when people are working at home. At the end of this crisis, a long line of companies will be seeking to be acquired and looking to raise capital. Do what you can to get to the top of the stack for when that time comes. Now is the time to focus on your top prospects and have casual conversations with decision makers, even if just to discuss potential deals, to build familiarity and credibility.
Andrew Daniel is an investment banker at Digital Capital Advisors, LLC, a technology focused global investment bank. Previously, Andrew founded The Kickoff Group, a consulting and advisory firm focused on providing strategic advisory to early and growth-stage technology companies throughout their life cycle.