How will the takeover market change during the current economic crisis?
The Covid-19 crisis is reducing the number of takeover deals. The global deal value is also decreasing. Depending on the sector, takeover prices sometimes come under pressure. But what are the other expected effects on the M&A market?
A crisis shakes the cards. New opportunities present themselves for financially sound companies. A buffer of cash offers opportunities to takeover weakened sector peers or to further diversify. As a potential acquirer or potential transferor, what should you take into account in these changing market conditions?
1. Question your business
Regardless of whether you wish to takeover a company or sell your company, it is advisable as a business manager to ask a number of crucial questions about the business:
- Can my company withstand a second Covid-19 crisis?
- What about my ratio of variable and fixed costs?
- Do my financial and other contractual obligations need to be rescheduled?
- Are my activities sufficiently diversified?
- Does my supply chain need to be reviewed?
- Have certain key customers or suppliers run into difficulties?
- Will this crisis change my customers?
The answers to these questions can undoubtedly strengthen your acquisition dossier, whether you are on the buying or selling side.
2. Enhanced due diligence
In view of the uncertain economic situation, the thoroughness and importance of auditing will only increase.
Important concerns will certainly be:
- To what extent is the EBITDA stable and predictable?
- Will the receivables remain collectable?
- How is the digitalization of the company progressing?
- How have reserves been built up in the past?
- Is there a Covid-19 crisis plan?
- How is the company's debt ratio composed?
These and other questions will give rise to a positive or negative evaluation of the acquisition opportunity. Being supported by competent advisors is crucial in this phase of the process.
3. What about financing?
IIn principle, there is sufficient money available in the market to realize takeovers. The support package currently on the table within the EU can certainly support the financial market. In addition, there are plenty of other players (private equity, family offices,...) who are looking for interesting opportunities.
However, certain sectors that have been severely affected by the current crisis will not find it easy to attract parties to embark on an adventure. A considerable amount of own resources will be necessary to convince parties to support the financing. It is not excluded that other additional guarantees will be requested.
Less or hardly affected sectors will, as in the past, find financing more easily. But here, too, it cannot be excluded that more bank guarantees will be required, as banks are already making significant provisions in the quarterly results for credit losses.
4. More demand for vendor loans and earn-outs?
In previous years, in about 1/3 of the acquisitions the transferor bridged part of the financing with a loan to the buyer (vendor loan) or part of the acquisition price was paid after obtaining future results (earn-out).
It is certainly not excluded that potential buyerss may ask the transferor for a greater commitment. This may partly have to do with the banks that come up with less money and/or because such constructions give more confidence to lenders.
5. Will takeover opportunites receive more attention?
Since there will be fewer acquisition files on the table, the good opportunities with robust financial results may well receive more attention.
This could mean that the "expected" contraction in prices will not necessarily take place.
Sectors/companies, which are struggling due to the crisis, will find no or hardly any acquirers. Unless an acquirer has been triggered for a specific reason, but then in all probability little will be paid for the takeover.
If you are entering the takeover market as an acquirer or transferor, it is best to take these 5 changing market conditions into account. They can only increase the chances of a successful acquisition.