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Risk and uncertainty.
Weighing these visceral emotions – credited with causing a huge slowdown in the merger and acquisition marketplace – against discovering new ways to understand the value of a company are key elements in the struggle to move mergers and acquisitions forward during the era of COVID-19.
“Pre-COVID, there was strong activity in the M&A market, and it looked like it was going to be a banner year,” said Katie Smarilli, president and CEO of Smarilli Strategic Partners in Lancaster.
When coronavirus threw the hard brakes on activity and commerce around the world regionally the merger and acquisition sector stalled, too.
“It’s been weird in (the past) 10 years there have been up and down cycles in the M&A community. Right now is very interesting because you have some business listings that are completely back-burnered,” said Scott Stevens, first vice president of SBA lending at 44 Business Capital, a division of Berkshire Bank in Camp Hill.
Some area professionals noted deals, even though they were within weeks of dosing, completely shut down without hopes of restarting. Stevens said some sectors – mainly leisure and hospitality, continue to suffer. While other sectors such as tech, home delivery services and others declared “essential” during the height of the pandemic, continue to thrive and find themselves busier than ever.
For strategic buyers, today’s climate could be a great time to expand offerings or geography, although “I’m not seeing a whole lot of those types of buys going on right now,” he said. Too many unknown factors continue to drive “this scenario” of slow buying.
The likelihood for continued uncertainty and tip-toe risk taking are predicted to drag on in the M&A community, until effective therapeutics or a successful broad-scale vaccine is available to the public, according to Stevens.
Proving value is harder
But the past five months of business as unusual doesn’t tell the whole story.
Prior to Covid-19, valuations, a critical component of the due-diligence process for sales and acquisitions, were predictable and straightforward affairs. Now companies must show value alongside the specter of interrupted cash flow or tanked sales because of governmental shutdown orders.
“The pandemic has definitely changed how a company has to prove their value,” Stevens said ” … Business valuations, they’ve changed, and all the (former) rules are off.
Smarilli said valuations have played a huge role in the current M&A slow down.
“Typically, in the past when a company is going to sell or buy they look at the performance of the company. This year has really thrown a wrench into valuations; she said.
It works both ways.
Finns who have struggled during the pandemic won’t have an accurate picture of their worth over time to show a seller. And companies that have experienced sudden, fast growth may have a COVID-inflated balance sheet that doesn’t extend past the current pandemic-driven cultural reset
“The difficulty is how big of an increase (in value) will stick in subsequent years. Now people are (considering) forward looking projections – many private equity firms look at that,” Smarilli said. While private equity or investment buyers look hard at valuations, financial buyers are looking at a company’s history and past performance.
“It really has been a big issue. Look at a company, what is it worth?” Smarilli asked.
Small market sellers are still keen to sell, she said, but listing a firm for sale depends upon how much of a financial hit they sustained, and what their prospects look like moving forward.
“Buyers are still interested in buying, but it’s taking longer,” she said.
Since March most firms became more internally focused, which is one of the reasons Smarilli believes acquisitions also slowed down.
In Pennsylvania, businesses impacted by shutdown orders also had to deal with a ban on construction activity. As a result, many companies were forced to take a hard look at their resources, revenue and operating plans.
Smarilli said M&A interest and activity has picked up since June, and she’s cautiously optimistic that trend could continue.
For smaller transactions Smarilli said the CARES Act and Small Business Administration financing created incentives for buyers to make acquisitions in an effort to help small businesses.
She said lenders needed to become comfortable with current clients and may be going a little slower than they had prior to Covid-19.
Meg Mueller is senior executive vice president and head of commercial banking at Fulton Financial Corp and Fulton Bank in Lancaster. She said expectations for M&A absorptions, combinations and mergers “are going to happen” but it’s still too early to tell how and when those deals will get done. Many buyers continued to err on the side of caution.
Mueller expects the “psychology of being willing to take a risk” to continue until the full impact off COVID-19 – its duration, impact on the workforce and the economy, can be fully understood.
In industry sectors like healthcare related manufacturing, consumer goods manufacturing, shipping and distribution should continue to do well and might be among those to see some merger and acquisition activity.
“These [industry sectors] are always looking for M&A opportunities, no matter what the time. M&A in a normal economy is opportunistic … it’s about finding the right opportunity at the right price,” she said.
Because company prices are usually driven by “the multiple of earnings” which Mueller said were very high prior to coronavrius; she predicted better pricing opportunities ahead. The “multiple of earnings” is a calculation used to arrive at a company’s financial worth.