Bass, Berry & Sims attorneys Kris Kemp and Ryan Thomas offered insights for an article in Corporate Board Member discussing the challenges and opportunities on the M&A landscape following the COVID-19 pandemic.
“Right now, people just don’t know what companies are worth,” Kris offered as a reason for the decline in M&A activity in Q2 2020.
It’s critical for sellers to make sure they have enough capital that lets them get through the process while they operate the business and not put themselves into a position where they have to take an offer at the end of their cash runway, Ryan advised. Tapping into additional funding is one way to do this, including state and federal relief packages, but they should be prepared for buyers to request that those funds are returned before the deal closes. However, companies can look at those loans as insurance and a backup plan in case a deal falls through by waiting to pay back funds until the deal is confirmed.
While many sellers have created efficiencies and cut costs during COVID-19, Ryan suggests that these may not be captured in the valuation of a sale. Kris posits that sellers can bridge the valuation gap of a significant ask-bid spread via an earn out until the company is in a position to get what is agreed as normal again – and then get the full payment.
For buyers, Ryan and Kris suggest public companies should go ahead and pursue opportunities rather than waiting to avoid letting competing bids get their first. “On the buy side a year ago, what Ryan and I were hearing from our clients was ‘I’m participating in a lot of processes and trying to be financially disciplined in my valuation approach, but it’s awfully hard because there’s a lot of money out there chasing deals,'” Kris said. “So, now really is the right time to buy because there’s not as much money out there chasing deals.”
Looking forward, Ryan suspects the second half of 2020 will be busy. “I’m seeing signs that deals are coming back to life again, as long as people still trend towards reopenings and things like that, or there’s not some massive spike that kind of scares people,” he said. “There’s a lot of pent-up demand for transactions, so I think that’s going to manifest with some pretty good M&A activity probably over the mid- to late summer extending into the fall – until there’s some sort of other wave 2 or whatever hits at that point.”
While prior thought suggested things would slow down due to uncertainty around the election, the pent-up demand and rise in transaction opportunities could propel a healthy M&A market through the end of the year and beyond regardless of national politics.
The full article, “Pulling the Trigger on M&A,” was published by Corporate Board Member on June 4 and is available online.