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small business mergers and acquisitions (M&A)

Is Now the Time for M&A?

The tentacles of the coronavirus-sparked economic downturn have reached nearly every area of the business world, and that includes mergers and acquisitions (M&A).

Sycamore Partners, which in February agreed to pay $525 million for a 55% stake in L Brands’ Victoria’s Secret, reached an agreement with L Brands in May to terminate the deal. In March, Xerox ended a hostile takeover bid for rival HP – a four-month effort – citing the need to respond to the coronavirus. And these are just two high-profile examples of a growing trend.

Covid-19 has scuttled deals, slowed down M&A agreements already in the works, and convinced some companies to avoid seeking out acquisitions in the short term. And while states are slowly beginning to “reopen,” mergers-and-acquisitions activity could continue to be muted for some time.

Read on as we look at the landscape for M&A right now, and whether the current moment might (or might not) be an opportunity for some small businesses.

No Doubt: Covid-19 Is Cramping M&A

The previously mentioned examples of snuffed deals appear to be a fair reflection of the broader M&A environment.

“Global mergers and acquisitions have already plummeted as result of the coronavirus crisis, and by the end of March 2020 had reached a near standstill,” AllBusiness’ Richard Harroch writes in Forbes, citing Refinitiv data. “M&A levels in the United States fell by more than 50% in the first quarter to $253 billion compared to 2019, but most of those transactions were entered into or closed earlier in the quarter before the crisis spread worldwide.”

In a recent Datasite poll of 100 global M&A professionals, 80% said worldwide economic declines are causing, or are likely to cause, significant near-term strategy adjustments. More than 55% said they expected to shift away from growth strategies, and toward maintenance or restructuring strategies.

Another window into how the coronavirus is affecting M&A? A string of lawsuits concerning Material Adverse Change (MAC) clauses, which effectively allows the buyer to abandon a deal before closing should an event detrimental to the target company occur.

William O’Neill, partner at Winston & Strawn LLP in Chicago, told The Wall Street Journal in May that these clauses were “mostly an afterthought” in M&A contract. However, “since the start of April there have been more major lawsuits over MAC clauses than in the previous 10 years, Mr. O’Neill, who represents private-equity funds and their portfolio companies, added.”

Naturally, the question is “Why?”

The answer? Well … there are a ton of those.

Restrictions put in place to fight the coronavirus are slowing down existing deals. Compliance, negotiations, discussions … everything is simply taking longer than it normally would. Buyers are asking for longer exclusivity periods to get a better handle on how Covid-19 might be affecting the target business. Debt financing is increasingly difficult to come across. And trying to determine an accurate valuation has been made exceedingly more difficult thanks to frequently changing business conditions.

These issues and more have conspired to brake M&A activity to a snail’s pace.

What Should Small Businesses Know?

Regardless of what side of the M&A coin you’re on – you plan on buying, or you’re looking to be acquired – expect a more difficult time and a considerably longer, more agitating process.

And specifically, if you’re buying, be prepared to ask many more questions than usual.

“What kind of impact has Covid-19 had on your accounts receivable since March?” “Have you furloughed or laid off employees?” “Is your company adapting well to remote work, and what does your lease situation look like?” “How many of your clients have been hit hard by the pandemic?”

Yes, we’ll return to normalcy some day. But no one knows when that day might come, so until then, you’ll have to ascertain just how ugly the current reality is for any target.

M&A has never been easy, but in this far more complex environment, it pays more now than ever before to seek out the advice of professionals seasoned in the world of mergers & acquisitions. McManamon & Co.’s M&A experts can support you to position your business for a sale and determine the value of your company, or help you identify target businesses and negotiate favorable deal terms.

While it’s a difficult time for dealmaking, crises can spawn once-in-a-lifetime opportunities. Let McManamon & Co. help you determine what your options are. Give us a call at 440.892.8900 or contact us online today.

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