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Welcome to the May 2020 edition of M&A Insights. Our goal is to help you stay up-to-date on the Mergers and Acquisitions climate.

This month, we would like to continue highlighting COVID-19’s impact on Lower Middle Market deal making.

Key Points:

  •  First and foremost, as you would expect, it continues to be too soon to predict with any accuracy its mid-to-long term effects. However, we do feel with more certainty there will be a “new normal.”
  • What we do know:
    • Buyers initially stepped away from closing deals, at least for the short-term. Pepperdine’s Q1 2020 Market Pulse Report, compiled in April after surveying 400+ Investment Bankers, reports:
      • 48% of the Bankers’ transactions have been delayed, 40% remain on schedule, and 12% were canceled.
        • Of those delayed, 14% were expected to be delayed up to 45 days, 58% were expected to be delayed 45-90 days, while the remaining 28% were expected to be delayed longer than 90 days.
      • Of the cancelled transactions, 53% were due to the Buyer, 24% were due to the Seller, 19% were due to financing arrangements falling through.
    • Buyers stepping back is not only due the uncertainty regarding acquisitions, but also due to their need to perform triage on their portfolio companies.
    • Lenders are distracted. Banks have been overwhelmed by the Government Assistance workload and are focusing resources on existing clients who are struggling with cash flow issues.

What We Are Seeing and Expect to See:

  • Buyers are now returning their focus to acquisitions as their portfolio companies have somewhat stabilized.
  • However, Buyers are looking at opportunities differently than pre-COVID. They expect to see more value opportunities as deals will have been repriced by the market. Also, they will more readily employ Earnouts and other measures in an effort to risk share with Sellers the Company’s future performance.
  • Some business owners who were considering selling before COVID are holding-off their exit plans for fear of selling at a severe discount. However, Baby Boomers who still own many companies may choose to go forward as they may feel the window is closing on them.
  • Lenders will be slowly moving back into the M&A market if they feel they can assess economic risk. Expect to see less leverage, higher spreads, and other structural measures that provide Lenders comfort. Relationships will be important.

 In Summary:

  • There is a “new-normal” for the M&A market, but the lenses used to view it with any clarity are still very foggy.
  • How quickly companies resume normal (which too needs to be defined) operations and how successful the country will be at not letting the curve take off again will be keys to providing clarity.
  • Buyers still hold record levels of capital “earmarked” for acquisitions, but at what price level will Buyers and Sellers will be comfortable remains a question.

If you would like to learn more about the M&A market or are ready to take the next step to explore your options, we would be glad to meet. Please contact me at 480-351-8533 or myoung@cksadvisors.com.

 

 

This Post is for informational purposes only and does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities. While the information provided herein is believed to be accurate and reliable, CKS Advisors, LLC and Ashland Securities, LLC make no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person. Certain Principals of CKS Advisors, LLC are registered representatives of Ashland Securities, LLC Member FINRA, SIPC. CKS Advisors, LLC and Ashland Securities, LLC are separate and unaffiliated entities.  Securities and Investment Banking Services are offered through Ashland Securities, LLC.