Merger and acquisition (M&A) deals have slowed during 2020; a year dominated by a global pandemic with reduced investment flowing towards COVID-specific assets classes such as personal protective equipment (PPE), remote working and learning solutions, and back-office technology and infrastructure for firms moving online. According to S&P Global Platts, in the United States of America (US) during the first three quarters of this year, the industry saw 81 deal announcements, worth a total of US$7.75b; this is compared to 200 deals worth US$47.05b over the same period in 2019.
Despite a bleak year, the market appears to be surprisingly optimistic. According to a poll of executives and M&A professionals, 87% of respondents said they expect M&A activity involving privately-owned companies to increase in 2021. The poll, conducted by law firm, Dykema Gossett PLLC, also revealed that more than seven out of 10 respondents expect to close a deal during the next year and 71% believe that the market will strengthen.
Part of this strengthening deal flow attitude is due to the broader economic recovery and confidence in the market as a whole. In its latest World Economic Outlook, the International Monetary Fund (IMF) predicts the global economy to experience a 4.4% contraction in 2020 and a partial rebound to 5.2% growth in 2021. In Dykema Gossett PLLC’s survey, respondents are optimistic about the economy after the U.S. fell into recession earlier this year. Six in 10 said they hold a positive view of the economy over the next 12 months; 17% hold a negative view, and the remaining 23% held a neutral view.
Reece Tomlinson, MBA, CPA is the founder of RWT Growth Inc., an investment banking advisory firm that focuses on M&A transactions, helping companies access capital via debt and corporate advisory. He is an expert in helping growing companies secure finance and here, discusses the two approaches companies are taking and why now is an opportune time M&A.
“As an investment banking firm with offices in London and Canada, specialising in M&A, capital transactions and corporate advisory, we are seeing two distinct strategies being utilised amongst our clients.
One strategy is to be aggressive and make acquisitions happen whilst the market is opportune. The other is to sit tight and wait until things normalize.
The former option is proving to be a popular one and there is a strong case for making acquisitions during this COVID-19 induced downturn in the economy. Here are five reasons why companies should be considering acquisitions, as a growth strategy, during this COVID economy.
- Acquiring during a downturn has historically produced greater total shareholder returns (TSR). A recent study performed by EY and Capital IQ indicates that companies making acquisitions that totalled 10% or more of their market cap in the 2008 downturn created 5% more TSR over a three-year period then those who did not. Done properly, strategic acquisitions that serve as a platform for long-term success via revenue, customer and asset growth; will provide the acquirer with the ability to capture above market returns when market conditions begin to stabilize and grow.
- When using debt to finance an M&A transaction, it becomes more affordable when interest rates are low. As I write this, the Bank of England’s base rate is at 0.1%, which means debt financing in the UK has never been cheaper. This low interest rate environment has a wide number of implications, the majority of which I will not get into, however, it does translate into a higher capacity for acquirers to service debt, thereby making M&A deals more feasible from an affordability, size and aggregate basis.
- Using the financial crisis of 2008 as the most recent comparison to what we face today, M&A valuations decreased by approximately 27% during that time period. As such, companies making acquisitions during this period observed substantial discounts to market value. When companies, divisions and assets can be purchased for below market pricing it creates immediate value for the acquirer.
- According to the United States Small Business Administration, 90% of businesses fail within two years after being struck by a disaster. When we compare this to the economic impacts of COVID-19 it is certain that many businesses are going to be irreparably damaged. Furthermore, businesses that fail to adopt new technologies and ways of operating in this environment will only fall further behind. As a result, companies and ownership groups who have been negatively impacted by COVID are likely to be open to acquisitions, which can likely be acquired with favourable terms and valuations.
- Having excess liquidity on the balance sheet without effective utilisation does not create increased shareholder returns. Therefore, when companies are sitting on excess liquidity it is important to ensure cash is utilised in a manner that is going to generate above-market shareholder returns such as strategic M&A transactions at below-market valuations.
For companies that have confidence in the post-COVID recovery dynamics of their industry and are looking to add strategic value, the time is now to make acquisitions.”
For more information visit: www.rwtgrowth.com
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