Acquirers and their investors have slowly learned to operate in the new market conditions, and M&A activity has begun to increase from virus-driven lows. The coronavirus shocked markets and spurred many questions, but clients' comfort levels have grown in the last month, said Grant Thornton Advisory Services Director Michael Joseph.
When COVID-19 first impacted companies, acquirers stopped doing new deals, instead focusing on completing ones already in process, Willis Towers Watson Senior Director David Hunt said. But they've started buying again.
Buyout investments hit the highest quarterly market share since 2001, accounting for 26.5% of the total U.S. M&A investments in the second quarter, from 24.5% in the first quarter, according to Mergermarket. Buyout investment recorded 192 deals worth $15 billion in Q2, down 47.1% by deal count compared to Q1 this year (363 deals, $48.6 billion), and the lowest Q2 deal count since 2014. In the first half of the year, 555 buyout deals were announced, worth $63.7 billion.
For transportation and logistics specifically, M&A volume and value declined during the first half of 2020 compared to the peak in the second half of 2019 — but average deal size increased 9% to $377.1 million, compared to the first half of 2019, according to PwC. The firm expects deal activity to pick up in the second half of the year, although perhaps not reaching peak-2019 levels.
"Investors are expected to remain cautious considering the current global economic scenario," the firm said. "Corporations will continue to focus on their liquidity position, which should spark additional divestments."
But for private equity, getting back to making deals is important, Joseph said, because there's an obligation to investors to actively look for investments to deploy capital. According to PwC, private equity is "well positioned" for investment opportunities in the transportation and logistics industry.
Due diligence changes
In deals, numbers need to be brought to the story, but it's harder to use historical data to predict the future, Joseph said.
Acquirers are looking at data — such as whether sales increases during the coronavirus will be temporary or permanent — in a different light. According to Joseph, they're also searching for financial risk indicators, such as whether targets and customers are slower to pay bills.
While a mound of cash built up before the pandemic has led to a significant amount of capital to chase distressed opportunities, Maupin said, there is little danger of acquirers significantly overpaying.
"There is competition out there," he said. "You may run the risk of outbidding the stalking horse bidder, but still gain advantages — important levers to pull, such as getting rid of leases in bankruptcies and buying assets free and clear of liens. You’re able to operate a business with a leaner capital structure."
PwC also projected that acquirers will look to take advantage of opportunities with distressed companies. "Sellers will continue to look into divestitures to free up cash for liquidity or strategic investments," the firm said.
Hunt said due diligence is taking unusually long. Some people from whom an acquirer needs to get information may no longer be in the office. An acquirer might want to know how an IT system was established only to be told the person who created it was furloughed, Hunt said.
Supply chain due diligence is also dragging. It used to be just a financial exercise, like looking at pricing or possible synergies between the target’s supply chain and that of the acquirer's, Hunt said. Disruptions were very short lived and local. But today, potential acquirers need to see how targets handle disruptions and what mechanisms they have in place to handle future ones.
Another altered aspect of due diligence: More can go wrong with HR and other interactions with a target’s employees, at both ends of a deal. "They're looking deeper into these non-financial issues," Hunt said.
Uncertainties and disruptions
The closing, re-openings and re-closings that have been going on haven't affected deal making because the initial closing and re-openings were short-lived.
Employee safety, a matter acquirers paid little attention to before, has become top of mind, Hunt said. And the commonality of layoffs, and how they are handled, is under stepped-up inspection.
One of the keys to making a deal a success, he said, is to integrate a target's employee into an acquirer. This has become more difficult, because the personal connection of face-to-face meetings are no longer an option. At the same time, Hunt said, virtual data gathering has been commonplace for years, with virtual data rooms and telephone conferences between the participants on both ends.
The infrequency with which government regulatory staffers are in their offices also causes M&A activity to drag, said Ron Oertell, CFO for LendingUSA, an unsecured consumer lender focused on point-of-sale locations with 10,000 merchants. Oertell said determining the valuation of targets has become harder. While "innovation" has had the compelling character of a "shiny new thing" for years, some of the attractiveness has diminished in some sectors, he said.
Acquirers have to look harder at the reasons for a target's success, especially whether those reasons can keep the target thriving. A target may have seen success as an early online meeting vendor, for example, but its profitability and market share could be drained due to low entry barriers.
"We have seen increased interest in start-ups, including non-controlling investments by incumbents to get access to technology and innovation that disrupt [transportation and logistics] business models. We expect COVID-19 to accelerate this trend," PwC said.