The COVID-19 Pandemic: Potential M&A Transaction Issues and the Way Forward

Although this year started with a strong economy, it soon became clear that the novel coronavirus (COVID-19) could not be contained, and a worldwide panic began. Economies shut down, and a major decline in global financial markets ensued. In addition, businesses that were successful prior to the onset of COVID-19 were suddenly facing forced closure and a significant decline in revenue. In many cases, the overall value of companies has been reduced dramatically as a result of the pandemic.

All of this uncertainty has also had a negative impact on the mergers and acquisitions (M&A) market. For instance, many M&A deals that were in process prior to the pandemic have stalled. In our view, there are several other post-pandemic M&A transaction issues currently impacting the market:

• In the near-term, the increased business and market uncertainty related to COVID-19 will likely limit the number of strategic buyers and private equity funds participating in any new M&A transactions.
• The M&A market’s value estimation model is temporarily “out of order.” Normal market comparable information for M&A transactions is difficult to obtain, and therefore, accurately developing an appropriate estimate of a company’s market value will be challenging in the near-term.
• In a regular M&A process, the financial performance of a business is “normalized” with EBITDA adjustments to isolate and remove unusual, non-recurring and owner-related expenses. The pandemic is undoubtedly unusual and – hopefully – non-recurring. Still, it will likely result in a large list of atypical EBITDA adjustments. The end goal is to normalize the business operations for the sale process and attempt to remove the effects of the pandemic in the business.
• Uncertainty has shifted the M&A market into a buyer’s market. In this market, if sellers want to attain higher deal valuations, they will likely need to be more flexible in accepting deal terms. This may help sellers attract buyers and still achieve a reasonable valuation.
• During the pandemic, debt financing has become more difficult to find, and it is no longer a borrower’s market. While banks are interested in looking at new lending opportunities, lenders’ internal credit processes are more protracted and risk-averse.
• The typical face-to-face management meetings, plant tours and other due diligence meetings that occur as part of an M&A process have, for the most part, been put on hold, and it is unclear when this part of “business as usual” will resume.

Moving forward, it will be critical for business owners wishing to pursue an M&A deal to thoroughly understand and describe the effects of the pandemic on their business so they can begin to develop mitigation and positioning strategies for a post-pandemic sale of their company. My colleague Terry Bressler, a managing director on Prairie’s Investment Banking team, has authored a detailed paper to help guide companies through this unique time in the M&A industry.

Hillary Hughes is director at Prairie Capital Advisors. You may email her at hhughes@prairiecap.com.