New opportunities: Why economic volatility could resuscitate M&A

By  – Staff Reporter, Dayton Business Journal


Corporate dealmaking experienced a rapid bull run in the years following the 2008 financial crisis. Low interest rates and economic optimism spearheaded a prosperous upswing for the global M&A market. Deals inked last year are estimated at nearly $4 trillion, according to fin-tech firm Refinitiv.

Coronavirus brought that trend to a crawl. As activity dropped and cash-strapped businesses scrambled to manage liquidity, global M&A deal volumes in the first quarter of 2020 fell nearly 36% year-over-year, with the U.S. careening to a 50% decline.

Consumer-focused industries, like hospitality and tourism, were hit the hardest. Others, like the government contracting market, have held relatively steady. As the pandemic picks winners and losers, companies at the forefront of the economic rebound may find themselves well positioned to conduct deals.

“For some of our clients, if you were potentially in the market to grow through acquisition, it may be a great opportunity right now,” said Brandon Gross, director with Dayton-based CPA and business advisory firm Flagel Huber Flagel.

Note: Click here to watch a replay of DBJ’s Working in the Age of Coronavirus panel discussion. Enter name and email address – the recording will begin.

A common trend locally, Gross said, stems from companies that were preparing for M&A activity before the pandemic put most transactions on pause. Economic consequences of the pandemic devalued some private assets, and that could be opportunistic for companies whose liquidity streams remain bullish.

“In those instances, valuations and multiples might be very attractive, and they are very attractive to some of our clients,” he said. “You may be able to look at businesses that might trade at a fraction of what they would have six months ago.”

That doesn’t mean there isn’t risk involved. Unpredictable variables, like future changes in consumer sentiment, could impact the speed of an economic rebound, Gross said.

On the flip side of the coin, liquidity constraints could still hinder companies that want to pursue strategic takeovers — though there are resources that could help improve short-term cash flow.

The Federal Reserve’s Main Street Lending Program, for instance, is offering loans between $250,000 and $300 million for small- and middle-market companies that were not overly leveraged in 2019. As well, the U.S. Small Business Administration has agreed to pay six months of principal, interest and fees on 7(a) loans originated between March 27 and Sept. 27, 2020.

“There are programs out there that would provide a cash infusion,” Gross said. “There’s also a lot of capital that’s sitting on the sidelines if you’re in a position where you want to buy a business, or potentially sell your business. So, those options still exist.”

And despite a waning shift in M&A during the first quarter of 2020, an uptick may be on the horizon.

“I think you’re going to still see a lot of activity,” Gross said. “A lot of activity paused as we entered this period in mid-March. I’m starting to see some of that pick back up.”

For companies that aren’t in a position to grow through M&A, opportunities are still abundant, Gross said. Businesses that experienced a shift in size or scope this spring have a window to rebuild outdated policies, processes and procedures to position themselves for prosperity when the economy rebounds.

In that same vein, most of Flagel Huber Flagel’s clients have begun exploring innovations to maximize efficiency on a go-forward basis.

“There are always going to be opportunities in innovation to come out of times that are very tough — and a lot of that is because your hands are forced,” Gross said. “You have to innovate. When times are good, there may not be as much of a need or pressure to do so.”

As companies continue to adapt and explore new strategies, maintaining transparency — particularly with employees, landlords, vendors and other stakeholders — is key.

“Communication needs to be a core business principle,” Gross said. “There may be some conversations that you’ve wanted to have for quite some time. Now is the time to have those conversations, because everybody can relate to what you’re going through.”

Another piece of advice? Don’t be afraid to ask for help.

“If you’re a business leader, rely on the subject matter experts — whether it’s your accountant, attorney, insurance broker or HR professional,” Gross said. “Let them spend the time to be the experts in certain areas so you can focus on what you do best and come out of this a stronger business.”

Note: Click here to read additional coverage of the of DBJ’s Working in the Age of Coronavirus panel discussion.