Key Takeaways from the M&A and Capital Markets Roundtable Discussion with J.P. Morgan

June 12, 2020
Virtual

Recently, Bass, Berry & Sims attorneys Howard Lamar and Frank Pellegrino co-hosted a virtual roundtable discussion on the current M&A environment and companies’ access to capital markets following the COVID-19 pandemic with George Mattingly, Managing Director & Head of J.P. Morgan Southeast Investment Banking. Also included in the roundtable discussion were, Kenny Kraft, Executive Director, and Clark Benton, Vice President from J.P. Morgan Southeast Investment Banking.

Panelists shared their perspectives of the macroeconomic backdrop, implications on M&A and capital markets amidst COVID-19, corporate finance best practices, and their outlook for the remainder of the year. Here are 12 key takeaways from the discussion:

  1. Wall Street economists have started to coalesce around a 35% contraction to GDP in Q2’20, and while the expectation is for a sharp rebound in Q3 and Q4, annualized GDP is not projected to eclipse pre-COVID-19 levels until after 2021.
  2. As of June 5th, the S&P 500 was trading at 22x NTM P/E, which is five turns higher than the average over the prior four years.
  3. Previous downturns have witnessed significant near-term rallies before experiencing more sustained declines.
  4. ~44% of S&P 500 companies have suspended guidance, and a large number have proactively decreased dividends and/or suspended share buybacks, particularly within the Consumer Discretionary space.
  5. 50% of S&P 500 companies have tapped financing markets in some way or another since March 2020. The financing markets are white hot, with certain pockets of capital more readily available than others.
  6. The U.S IPO market has officially re-opened, and equity follow-on, convert and private capital markets are seeing heightened levels of activity.
  7. The leveraged loan market has been slowest to recover (though it is starting to pick back up). High Yield has rallied significantly, and technicals are extremely favorable to issuers as the high volume of new issuance hasn’t kept up with investor demand.
  8. COVID-19 exaggerated the decline in global M&A activity in Q1’20, but strategic dialogue remains active. With deal count and volumes stabilizing, we may have hit an inflection point in May, and reduced equity volatility, increased confidence and supportive financing markets should provide more of a tailwind to M&A in the near-term.
  9. Financial sponsors are increasingly executing complex, highly structured transactions as traditional leveraged buyout activity has declined during the pandemic.
  10. When bridging value gaps between buyers and sellers, earnouts can be helpful, but the devil is in the details…
  11. Informed business decisions are critical for fiduciary duty – consider unique pandemic concerns regarding supply chains, employee, customer and supplier health and safety, and capital allocation demands.
  12. Shareholder activism defense remains an important topic for corporate boards. Engage with your institutional investors and be prepared for activism initiatives if in a state of meaningful/prolonged decline.

Please click here to access materials from this roundtable discussion.