3 questions to smart minds

Has the coronavirus put the M&A market into a state of shock?

For this 3 questions to Carsten Häming

Corpo­rate Finance Consul­ting for medium-sized compa­nies in Düsseldorf
10. June 2020

German compa­nies post­pone their plan­ned M&A tran­sac­tions in the times of Corona or cancel them comple­tely; they are unsett­led. The envi­ron­ment for acqui­si­tion finan­cing is curr­ently not the best. Is the M&A market’s high-water mark at an end? Will the deals be put on hold?

For this 3 ques­ti­ons to Cars­ten Häming, Mana­ging Direc­tor at Corpo­rate Finance Mittel­stands­be­ra­tung in Düsseldorf

1. How do Corona-rela­ted measu­res affect transactions?

Simi­lar to the spread of the Corona pande­mic, the impact on the M&A market can be descri­bed in terms of a wave. Initi­ally, uncer­tainty among inves­tors and entre­pre­neurs went stee­ply upward, leading to an almost complete standstill in tran­sac­tions. In the course of the last few weeks and with the measu­res taken by the German govern­ment (flexi­ble short-time working allo­wance, fiscal liqui­dity assis­tance, billion-euro protec­tive shield for compa­nies in parti­cu­lar KfW finan­cing and the econo­mic stimu­lus program), uncer­tainty in the market decreased noti­ce­ably. Howe­ver, all M&A acti­vi­ties will now take place under diffe­rent condi­ti­ons and in signi­fi­cantly longer tran­sac­tion proces­ses. In our tran­sac­tions, we are seeing that buyers are curr­ently trying to push through a signi­fi­cant risk discount in the nego­tia­ti­ons in the form of a lower purchase price, a higher buy-back and/or a down­stream purchase price compo­nent (earn-out).

As M&A advi­sors, we are natu­rally called upon here on the sell side to conti­nue to demons­trate exis­ting growth oppor­tu­ni­ties and sustainable earnings of the company to be sold. In doing so, we try to reduce the current uncer­tain­ties as best we can. We assume that buyers will now be more asser­tive in the tran­sac­tion proces­ses and that the topics of “guaran­tees” and “MAC clau­ses” will be nego­tia­ted more inten­si­vely again in the future. Our aim is to ensure that medium-sized entre­pre­neurs, who have inves­ted a large part of their working lives in buil­ding up their own busi­nesses, are adequa­tely remu­ne­ra­ted for this, even in times of crisis. Some mana­ging part­ners who wanted to initiate their company succes­sion before the crisis are curr­ently still having reser­va­tions and are waiting for further deve­lo­p­ments. — It is often forgot­ten that for compa­nies whose busi­ness model has proven itself even during the Corona pande­mic (and is ther­e­fore crisis-proof!), the current situa­tion actually repres­ents an opportunity.

Uncer­tainty in purchase price disco­very will be a stumb­ling block for all future tran­sac­tions, espe­ci­ally in the hardest-hit sectors such as leisure, travel and retail. Here, buyers who show the most flexi­bi­lity to bridge the valua­tion gap will have a grea­ter chance of success in future tran­sac­tion processes.

2. Do you expect more distres­sed M&A tran­sac­tions now? If so, in what time period and in which industries?

The answer to this ques­tion is clearly “yes”. Distres­sed M&A tran­sac­tions are incre­asing noti­ce­ably across all indus­tries. Of course, many compa­nies in the services, leisure and travel, retail and auto­mo­tive sectors have been parti­cu­larly affec­ted, but almost all indus­tries are strugg­ling with decli­nes in sales and earnings. Compa­nies that were alre­ady strugg­ling before the crisis are now unable to absorb the new liqui­dity bott­len­ecks that have arisen as a result. Unless they can raise new debt capi­tal from banks or equity capi­tal from inves­tors, this special situa­tion inevi­ta­bly leads to insolvency.

Despite the noti­ceable increase in distres­sed M&A tran­sac­tions, we at Corpo­rate Finance Mittel­stand­be­ra­tung GmbH do not expect the big wave of insol­ven­cies until the end of this year. Curr­ently, compa­nies that are in crisis due to the Corona pande­mic can be exempt from filing for bank­ruptcy. Howe­ver, this exemp­tion is only valid until the end of Septem­ber. Those mana­ging direc­tors who are unable to restruc­ture their company by this date will then have to file for insolvency.

3. Are you noti­cing any chan­ges in the way finan­cing is struc­tu­red? Are there other preferences?

In fact, the first signs of change are appearing in finan­cing struc­tu­ring. Banks are tradi­tio­nally risk-averse and are ther­e­fore rest­ric­tive in gran­ting loans in times of crisis or are busy secu­ring the liqui­dity of their corpo­rate custo­mers and deal­ing with work­out issues. It’s no secret that banks are rest­ric­ting the flow of acqui­si­tion finan­cing as they focus on support­ing the day-to-day busi­ness needs of their exis­ting port­fo­lio custo­mers. This plays into the hands of buyers with stron­ger balance sheets and a cash war chest.

Further deve­lo­p­ments in the raising of debt capi­tal will depend on the extent to which the macroe­co­no­mic effects are reflec­ted on banks’ balance sheets. Medium-sized entre­pre­neurs should ensure that exis­ting covenants are not viola­ted or make agree­ments to modify them (coven­ant reset) or suspend them (coven­ant holiday).

The use of alter­na­tive forms of debt finan­cing and the inclu­sion of further capi­tal provi­ders should be exami­ned in any case, e.g. the use of debt funds. In addi­tion to raising debt capi­tal, compa­nies natu­rally still have the option of seeking an equity invest­ment for their busi­ness. All acti­vi­ties should take into account the new trends and circum­s­tances mentio­ned above. Parti­cu­larly in discus­sions with equity inves­tors, the latter will seek compen­sa­tion for the addi­tio­nal risk, for exam­ple in the form of higher return parti­ci­pa­ti­ons or earn-out clau­ses. The same applies to banks, which will also adjust their condi­ti­ons upward. If it beco­mes appa­rent that the finan­cing struc­tures will fore­see­ably become more complex and compli­ca­ted due to the invol­vement of diffe­rent finan­cing part­ners with diffe­rent contracts, colla­te­ral and inte­rests, a corpo­rate tran­sac­tion must in any case be mana­ged by an expert who has exper­tise and expe­ri­ence in the M&A area.

About Corpo­rate Finance Mittel­stands­be­ra­tung GmbH (CF-MB)

Corpo­rate Finance Mittel­stands­be­ra­tung GmbH (CF-MB) was foun­ded in August 2012 and is an inde­pen­dent corpo­rate finance consul­ting firm. The CF-MB team consists of expe­ri­en­ced corpo­rate finance consul­tants. A large part of the team brings many years of expe­ri­ence, exten­sive cont­acts and profes­sio­nal product know-how in the field of corpo­rate finance from their work at the former WestLB AG. — Trust and discre­tion are the basis for long-term busi­ness rela­ti­onships — ther­e­fore, indi­vi­dual and discreet custo­mer care and open commu­ni­ca­tion repre­sent the essen­tial prin­ci­ples of our consul­ting approach.

As a medium-sized M&A boutique with an exten­sive invest­ment bank back­ground, you as a medium-sized client can bene­fit from CF-MB’s corpo­rate finance solu­ti­ons and will be advi­sed by us compre­hen­si­vely and on an equal footing on all issues rela­ting to chan­ges in the share­hol­der struc­ture. From busi­ness valua­tions for medium-sized compa­nies in the course of the sale of company shares to acqui­si­tion finan­cing for the purchase of compa­nies, CF-MB is your relia­ble part­ner who atta­ches parti­cu­lar importance to discre­tion and professionalism.

Thanks to its many years of expe­ri­ence in struc­tu­red finan­cing, CF-MB is your corpo­rate finance part­ner that can also provide compre­hen­sive support in the finan­cing of corpo­rate acqui­si­ti­ons. This means that purchase price finan­cing, as an extre­mely rele­vant compo­nent of a company acqui­si­tion, can be repre­sen­ted by us from a single source. Based on many years of tran­sac­tion expe­ri­ence, a deep under­stan­ding of medium-sized compa­nies, profound indus­try know-how and in-depth capi­tal market exper­tise, Corpo­rate Finance Mittel­stands­be­ra­tung is your part­ner for sustainable and future-orien­ted solu­ti­ons.

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