M&A in the New World

September 2, 2020

1. COVID-19 Impact

While the COVID-19 pandemic paralysed M&A activity across the globe earlier this year, there now seems to be light at the end of the tunnel with countries and businesses beginning to reopen in an effort to breathe life back into both global and local economies.

There is no doubt that there have been, and will be, winners and losers from this pandemic. Certain sectors have benefitted hugely from the new ways to everyday life (particularly those in the tech, pharma and media). But there is also no question that many businesses have suffered, many fatally, especially those not able to quickly adapt.

However, whilst we foresee the very sad demise of many businesses in the tsunami that COVID-19 represents, we are concomitantly optimistic about the consolidation that will inevitably follow, which seems to be on the verge of taking off. This volume of activity will, we believe, sit alongside the more entrepreneur-driven M&A where individuals look to ‘exit’ their businesses after the stresses and strains of the last 6 months. And, on top of that, there is significant capital in the private equity community which simply needs to be spent.

Well-run businesses that are operating in resilient markets will undoubtedly command higher-than-usual valuation premia this year. However, those businesses now limping along with dramatically lower revenues, unmanageable overheads and weak balance sheets may well be leaking in value as the year continues. It some ways the market is polarising.

While the future is ultimately dependent on both the path along which the virus re-accelerates and how individual governments respond, many commentators are also warning that other small (!) events such as Brexit and the US Election will come into play!

And so, whilst many are predicting a bumper Q4 for the corporate finance world, the Bluebox view is that we shall sadly need to sit and wait to see how the world transpires. After all, we would have been considered lunatics for suggesting at Christmas that our summers would be remembered for face masks and locked pubs.

2. Impact on Specific Features of an M&A Transaction

Due diligence

First and foremost, buyers will want to understand how a target will have been affected by COVID-19. Not only does this mean understanding the impact on the financial condition of the target in question, but also an increased focus on the areas of the business that may have been affected by the virus (positively or adversely). From an operational perspective, People and HR (furloughing and redundancies), finance (Government support packages), and IT (increased levels of home working) will be scrutinised.

Additionally, assembling data room documentation and arranging site visits and meetings with management will become increasingly challenging following COVID-19. There is a good chance that this could extend the average due diligence process, with the exception of the more ‘distressed’ deals which may move to a far tighter timeframe.

Deal structure and valuation

With greater impetus being placed on companies to manage liquidity in the face of uncertainty, it is also likely that we will see an increase in the proportion of share consideration/earn-outs versus upfront cash. Earn-outs are likely to increase in popularity, as they will provide a means to bridge a gap between sellers’ and buyers’ value expectations against a backdrop of unusual instability, COVID-19 ‘add backs’ and liquidity challenges.

Purchase price adjustment mechanisms

Until recently, locked-box accounts have been the preferred choice of purchase price adjustment mechanism. However, it is likely that we will see an increased use of completion accounts as buyers seek to deduce targets’ new “normal” levels of working capital.

Warranties & Indemnities

Buyers will consider whether there needs to be any COVID-19 specific warranties to ensure they are protected against any risks resulting from the virus. From the seller’s perspective, they will likely try to minimise the warranties they provide and, in many cases, seek to obtain W&I insurance as necessary for cover. They will need to be mindful, however, that certain insurers are attempting to exclude COVID-19 from their policies to mitigate risk.

3. Corporate Finance advice post-virus

As we move forward post-virus, the world of corporate finance ‘deal doing’ is likely to be very different for some. The priorities and requirements of some business owners will have changed and the traditional “hands on” advisory service model may not suit all.

In parallel to the existing team offering at Bluebox, we are delighted to have launched a new range of products branded “Velocity” which address, what we believe to be, a gap in the market. Do take a look at www.blueboxvelocity.com. The products are very accessible in terms of pricing, have been put together by a budding team of techies and involve a far lower level of handholding when compared to Bluebox. Maybe this is the start of new generation of corporate finance?

Bluebox Velocity provides business owners looking to sell their business, raise funds, or buy a business, with menu-based corporate finance products and packages. There are no tie-ins, exclusivity clauses or monthly fee commitments, giving customers flexibility to navigate their M&A processes on their own terms. Of course, some business owners will want, need, or prefer the traditional corporate finance approach, in which case Bluebox is here to help as always!

To continue to read about our traditional corporate finance offering Bluebox, please visit us at www.blueboxcfg.com.

To find out more about our sister business Velocity, please visit www.blueboxvelocity.com.

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