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What’s Happening With M&A — How Can You Get Ready?

April 24, 2020

Greetings from the M&A team here at Shulman Rogers! First and foremost, we hope that you, your family and your team remain healthy and safe during these difficult times.

Status Check

We are now more than a month into the U.S. COVID-19 shutdown and several months into the broader global crisis.  The impact on U.S. and global M&A activity has been both sudden and severe. Global M&A for Q1 2020 is down 33% as compared to Q1 2019; and the value of announced mergers in the U.S. is down more than 50%.  Among the many factors exacerbating this already difficult situation are the increasing scarcity of debt financing for new acquisitions as banks are preoccupied with SBA lending and other urgent client needs, as well as the challenges that buyers and sellers have in fixing and agreeing upon valuations as many industries contract due to the global downturn.

Not surprisingly, most parties that were considering M&A transactions before the onset of the pandemic have either put those transactions on hold or abandoned them.  Nevertheless, some deals are moving forward, including deals where the target or its industry are insulated from the effects of COVID-19, and where the target’s business has increased as a result of the pandemic.

For the companies delaying or abandoning deals, their focus has rightly shifted to shoring up their businesses as they prepare for a longer downturn. We have assisted many of our business clients in addressing the immediate challenges facing their businesses as they navigate these turbulent times.  Perhaps most critical, we’ve helped them obtain financial relief through millions of dollars of SBA-backed Payroll Protection Program loans and state and local loan programs.

What About M&A?

While we don’t have a crystal ball to tell us how long this crisis will last and when M&A activity will spring back to life, if there’s anything that we’ve learned from prior downturns, it’s that bad times don’t last forever.  Every downturn creates opportunities for growth and progress. Those opportunities are not always obvious, and they often come and go quickly.  But they will be there for those ready to seize them, and readiness will be key.

How Can You Get Ready to Seize an Opportunity?

Maybe a company you were looking to buy can be acquired now or in the near future for a much more attractive price.  On the sell-side, maybe your company suddenly is in a hot industry – think personal protective equipment, cleaning supplies or online social networking – and you have the ability to sell now at a significantly higher price than you could have fetched pre-pandemic.  Again, some deals actually are moving forward now and getting done, and maybe yours could too. 

Bottom line: parties who are ready and able to move quickly will be best able to capitalize on the opportunities arising during and after this pandemic—which begs the question, “Are you ready to move quickly?”

For sellers, “being ready” means:

  • retaining and incentivizing your management teams;
  • doing everything you can to preserve revenue;
  • being prepared to prove to buyers that your business retains significant value and continued viability;
  • working with your legal counsel and investment banker to assemble a data room and identify interested buyers;
  • assessing go-to-market strategies; and
  • refreshing your valuation analysis.

For buyers, “being ready” means:

  • preparing to move quickly on a deal;
  • hunting for companies that can round out your capabilities or help you fulfill an unmet need in the marketplace;
  • considering creative alternatives to structuring acquisitions (including staged purchases and the use of earnouts and other contingent payment arrangements);
  • fine-tuning your diligence review processes to focus on how the pandemic has impacted target companies’ financial health and operations (including the pandemic’s impact on contracts with customers and suppliers, and the availability of insurance coverage that could soften that impact); and
  • drafting standard deal documents (e.g., preferred forms of nondisclosure agreement, due diligence request list, and letter of intent) and adding new and improved provisions to your acquisition agreements to address particular issues and risks created by the pandemic (with particular focus on pre-closing operating covenants, closing conditions, and material adverse change provisions).

In the meantime, we encourage you to visit our COVID-19 Resource Center, where you will find articles, legal alerts and webinar recordings addressing a wide range of topics, including SBA-backed loan programs, human resources and employment issues and insurance matters – you’ll find them to be both useful and practical.

And, be on the lookout for additional releases from the Shulman Rogers M&A team in the coming weeks as we continue to monitor developments relating to the COVID-19 pandemic and its impact on the M&A world.  Until then, be safe and take good care.

By: Aaron A. Ghais and Keith A. Marshall


 

MORE INFORMATION

The contents of this Alert are for informational purposes only and do not constitute legal advice.  If you have any questions about this Alert, please contact the Shulman Rogers attorney with whom you regularly work or feel free to contact a member of the Mergers and Acquisitions Team.