Has the coronavirus put the M&A market into a state of shock?
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.
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.
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. www.cf-mb.de