Update: M&A activity on lockdown?

Originally posted April 2020

October 2020

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October 2020 - Six months on from when we first published this article, this is what we're seeing now, including cautious drafting of warranties and more deferred considerations. We predict it will continue into 2021 but, whilst certain purchasers/investors have stepped back, the current conditions have also created great opportunities for ambitious investors with available cash resources.

Please get in touch if you have any questions on this subject by emailing jason.milkins@roxburghmilkins.com

We’ve been assessing the current situation for mergers and acquisitions (M&A) activity and taking a look ahead at what might happen in the short to medium term and the lasting effects. With our next few articles, we’ll be covering some of the things you can do to plan ahead at this time – whether you’re looking to sell your business now or in the next 2 - 3 years.

Immediate effect

The immediate effect of Covid-19 is that there has at least been a slow-down, if not a full lock-down of M&A activity - some deals have been cancelled, some put on hold.

This is not surprising and to be expected whenever there is any sort of economic shock - focus shifts to conserving cash not spending it. Valuations are up in the air (or, more accurately, down in the dirt). Acquisitive companies will be inclined to focus on their existing business rather than taking on another, while PE investors will be focusing on the health of their existing portfolios.

Tick-up soon?

After the initial shock, there will be opportunities and activity will tick-up. There is already talk of some PE houses having their shopping lists of target businesses.

Some sectors in particular (travel, hospitality) may see opportunistic ‘rescue’ or restructuring deals. It’s also likely there will be fewer buyers, meaning asking prices for businesses may be pushed down and buyers will be demanding deal terms weighted in their favour.

It is likely therefore that the revived activity in the market will benefit the buyers in the short term. Having said that, a lot of commentators are predicting a fairly quick M&A recovery - if that is the case, then there may only be a small window in which those buyers can take advantage.

Likely changes to deal terms

Buyers will push terms to their benefit:

  • Split exchange/completion to help buyers de-risk:
    • Operational integration may be more difficult to implement, leading to joint operation for a short period.
    • More desire to assess longer term response of target, its supplier and customer relationships to Covid-19 - how did they cope operationally? Will the target survive another shock without draining resources or cash reserves of the buyer?
    • Regulatory approvals may take longer to obtain.
  • Less cash on completion, more profit related/earn-out payments:
    • Typical approach to risk reduction where a business’s performance and value are less certain.

How can a seller protect itself?

Be clear about payment terms, in particular deferred consideration. Can you offer some other protection instead:

  • Can security be given or a portion of consideration be ring-fenced in escrow?
  • Is warranty insurance available as an alternative to deferred consideration?

Buyers are likely to be far more robust when carrying out due diligence so get yourself in good shape.  Undertake vendor due diligence and implement improvements identified to ensure you can present or protect your business as best as possible.

Purchasers are likely to be focusing on resilience and not just efficiency, for example:

  • weighing the cost savings of a Chinese supply chain against the security of a more expensive UK based one.
  • scrutiny of business continuity plans and how efficiently they were put into operation.
  • resilience of supplier and customer contracts and contracting processes.
  • business interruption insurance and/or provision for increased costs relating to future insurance now considered critical.
  • board level approach to risk management.

How we can help you?

Our team can perform any necessary restructuring to get you ready for sale and/or protect your assets. We can also help you negotiate some of the more aggressive deal terms that may come your way.

By carrying out vendor due diligence and addressing any issues, we can help you present as best as possible. We can assist with putting in place or updating policies and processes to cover all of the areas of resilience detailed above.

We’ll be publishing some further articles over the next couple of weeks that will cover the above issues in more detail but if you'd like to know more in the meantime, please email jason.milkins@roxburghmilkins.com

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