The COVID-19 pandemic that slammed the economy this spring could generate more M&A deals in the months ahead.
Sales involving distressed companies, asset sales and even liquidations could rise toward the end of the year and into 2021, according to M&A and turnaround professionals. They describe a landscape nearly eight months into the pandemic where businesses have exhausted federal Paycheck Protection Program loans they got in the spring and are awaiting a final decision on debt forgiveness, or where the payment deferrals their bank provided on a loan are coming to an end.
Some of those companies now feel distress as the pandemic drags on, leading their owners to search for options.
“We do think that as that wears off, some of these companies are going to struggle, especially those that may have already been facing headwinds going into COVID or maybe were not in a position of strength,” said Matt Miller, managing director of advisory firm BlueWater Partners LLC in Grand Rapids. “If the present crisis drags on and sellers get tired, we would expect to see more distressed M&A.”
BlueWater Partners has yet to actually see a material increase in M&A deals involving distressed companies. That could occur toward the end of 2020 or the first half of 2021, he said.
Miller and others say PPP and loan modifications that companies secured last spring may have delayed some companies from falling into distress.
“There’s a lot of seismic activity out there and we’re anticipating that there will be at some point in the next six months from now ... a lot more of these problems coming to the surface,” said Dan Yeomans, president of Amicus Management Inc. in Grand Rapids.
He pointed to businesses that were perhaps struggling to make it, and finding a purchaser is the best-case scenario.
“There’s also a lot of walkaways out there, and that’s what we’ll deal with first because it’s easier to deal with,” Yeomans said. “I’m aware of five or six businesses where the assets are just sitting there with the lights off, and the lights are not going to come back on. So, those walkaways will be the ones to deal with quickly, and then those sales.”
Settling for less
Owners of distressed companies that opt to go to market will likely have to settle for getting less than what they otherwise would for the business, advisers say.
If they are experiencing problems, sellers need to repair their financial position and restore earnings before they come to market, said Doug Wilterdink, founder and a partner at DWH LLC in Grand Rapids.
“More often than not, you don’t sell the business until it’s fixed,” Wilterdink said. “It is all about cash flow.”
If a company is losing money, it’s “not worth anything than the liquidation value of the assets,” Wilterdink said. Taking the time to restore the company’s financial health and positive cash flow does put “a number of other remedies on the table,” he said.
“The longer you wait (to fix problems), the fewer remedies that are available,” Wilterdink said.
Some business owners may prefer not to wait until the pandemic eases and the economy fully recovers to sell. They’re tired, profits and sales are down, and they lack the energy to steer the company through the storm any longer.
Max Friar, managing partner at Calder Capital LLC, has signed a few clients lately who want to exit now, even though they likely will have to take less for the business.
“The owners understand their valuation is going to take a hit, but they’ve just said, ‘I don’t care. I need to have this off of my back,’” Friar said. “I think 2021 is going to be a year of exhaustion.”
Economic outlooks forecast the U.S. economy to grow at a moderate rate through 2021 after a record decline in the second quarter and partial recovery in the third.
In a recently updated outlook, Comerica Inc. projected Real GDP growth of 3.7 percent for the fourth quarter. U.S. Real GDP growth will start 2021 at 4.0 percent in the first quarter, followed by 4.7 percent growth in the second, before leveling off in the second half and averaging 2.7 percent for all of 2021, according to the outlook. Comerica forecasts a K-shaped recovery with some sectors doing better than others.
“The recovery’s been better than expected on a lot of accounts, but as it drags on, we will hear from more weary business owners about not wanting to go through this,” Miller said.
At Grand Rapids investment bank and M&A firm Charter Capital Partners LLC, Mike Brown tells the stories of business owners who decided early this year to sell, had to wait when COVID-19 hit, and “who are now saying, ‘OK, I’m sick of waiting. I’ll take less.’”
Brown, who runs the M&A practice at Charter Capital Partners, expects to see M&A activity pick up in late 2020 and early 2021 as more owners that navigated through the pandemic decide to sell.
Charter Capital Partners in the last few weeks has pitched to more prospective sellers to represent them in a transaction “than we did in the last three or four months,” Brown said.
Much of the activity over the next six months with distressed companies will depend on how banks handle clients experiencing difficulty, whether they “start to kick people out,” want a company to refinance, or are willing to further amend credit agreements, Brown said.
“Next year’s going to be very busy,” he said, noting businesses that may have done well during the pandemic and — being recession-proof — may seek a premium for the company. Others may be weary after surviving the pandemic and may settle for less.
“There’s going to be a lot going on in the first half of the year,” Brown said.