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The state of mergers and acquisitions

The pandemic has changed the ways of M&A

Reid Mason, CPA | September 2020 Footnote

Editor's note: Updated August 31, 2020

With the merger and acquisition (M&A) market finally slowing down at the end of 2019 after years of record-breaking activity, the global pandemic and resulting market volatility appear to be accelerating the slowdown. However, private equity groups and M&A active businesses still have access to billions of dollars in investment capital, which may help stabilize 2020 and 2021.

So, what can we expect going forward from the mergers and acquisitions players?

Knowing the unknowns

With so many unknowns that come with the first global pandemic in 100 years, buyers (for the purposes of this article include businesses active in the M&A market and private equity groups) and their financing partners (primarily banks and debt funds) who were focused on new deal activity at the beginning of the year have now shifted their focus.

According to RSM’s Private Equity Insights report, titled “COVID-19: Rewriting Private Equity’s Playbook,” there were more than 1,000 new deals recorded in January 2020, which dropped precipitously to 778, 622 and 409, in February, March and April, respectively. Buyers have been pulling back due to market uncertainty, but they are also trying to guide existing portfolio companies through difficult times. This means significant time spent with management teams to develop short-term strategies to survive shutdowns, address employee safety issues, reforecast projections, communicate with lenders and address potential liquidity issues.

What the data tells us

The buyers’ financing partners are also working hard to preserve their investments. The mammoth and widely publicized Paycheck Protection Program (PPP) played a large part in their efforts. According to the Small Business Administration, through April 16, 5,000 lenders approved 1.6 million applications representing more than $342 billion. Through May 30, totals increased to 4.5 million loans and more than $510 billion.

The SBA started accepting applications again in July. Some of these lenders have assembled dedicated departments to process PPP applications and even purchased dedicated software to service them going forward. In addition, lenders needed time to step back and check the health of their existing portfolio just as the buyers did. This includes time spent working with management teams, addressing covenant defaults, liquidity concerns and potentially restructuring loans.

This shift in focus is further evidenced by a recent Harvard Business Review article, which reported on a survey of 50 executives and corporate development leaders. More than 50% of respondents noted a temporary pause on deal activity to allow them to assess the market recovery timeline. Some executives did note they were still completing late-stage deals and were pushing for accelerated timelines. About 25% of respondents noted slower deal flow for the remainder of 2020. Respondents’ companies ranged in size from $10 million to more than $5 billion in revenue.

Conversely, those investors and businesses with access to cash may enter the remainder of the year and next year with aggressive acquisition and strategic goals to turbo charge growth down the road. The Harvard Business Review article noted 23% of those surveyed anticipated no reduction in deal flow. Some intended to accelerate M&A activity in anticipation of opportunistic targets and more buyer-friendly valuations. Median valuations in the U.S. were down from just over 12 times EBITDA to 11 times EBITDA in the first quarter of 2020, according to a Mergermarket report. As the economic effects of the COVID-19 pandemic and a slide in M&A markets in general continue, there is reason to believe the valuation reduction trend will continue throughout 2020.

A decrease in pricing and market turmoil will certainly present opportunities for distressed investment and consolidation. The worldwide shutdown in response to COVID-19 caused significant stress for many companies who may find opportunity in partnering with a specialty investment fund. During the Great Recession, many specialty private equity groups, particularly debt funds, were created to supply financing to companies with no other access to liquidity. 

Competitors, suppliers and companies in related industries who have access to capital, whether from internal reserves or ownership, will also be on the lookout for opportunities to consolidate and take advantage of synergies, customer relationships, supplier leverage, etc. Those who can successfully execute their strategy will realize significant competitive advantages in the long term.

Access to funding

A positive note for the 2020 M&A market has been access to dry powder (cash available to invest), of which buyers had record amounts coming into the year. According to RSM’s Private Equity Insights report, as of the end of September 2019, the “U.S. PE [private equity] market held about $683 billion of unspent capital.” While a portion of that will go to support existing investments, M&A active businesses and private equity groups will certainly take advantage of opportunistic acquisitions.

Although many have idle cash, all parties will face challenges closing deals as they try to complete diligence. Businesses continue to balance safety with reopening especially with the impending second wave. While many buyers, financiers and their hired service providers shifted to virtual diligence, many will not feel comfortable closing a transaction until they have had a chance to speak with management and tour facilities in person. The same goes for sellers who will want to develop a more personal relationship with their potential owners than can be cultivated over a video or phone call.

Looking beyond 2020, large reserves of dry powder could dry up as low fundraising numbers in Q1 and Q2 2020 could cause slow M&A market activity further in the future. To have cash to invest, private equity groups raise money from outside investors, such as high net-worth individuals, pension funds, banks and governments. Since recovery after the Great Recession, many investors have allocated more money into private equity groups. The record amount of cash available to private equity groups has since decreased in 2020 as evidenced by a decrease in fundraising dollars during Q1 and Q2 2020. The cash still exists in the market and the federal reserve has done plenty to bolster the money supply, but as with any period of market uncertainty, some investors chose to hold onto cash until there is more clarity. With investors saving cash, this naturally leads to less allocation to private equity groups.

What’s the future?

Barring sustained economic uncertainty or a total collapse, it is reasonable to assume the M&A market could hold steady throughout the rest of 2020 and beginning of 2021. After the first shock of COVID-19 in late Q1 and throughout Q2 2020, businesses seem to be somewhat stabilized and prepared with a plan to survive the coming months and years. With states cautiously reopening this past spring and summer (to various success), M&A activity may also begin to reopen.

One trend, though, is for certain: The record-breaking years following the Great Recession have come to an end.

Reid Mason, CPA is a vice president and controller of Convergent Capital. He has more than 10 years of experience working with small and middle-market companies. You may reach him at or 612-800-6486.