On the first trading day of 2020, a typical headline was “Dow jumps 300 points to start 2020, continuing last year’s big rally.” The S&P 500 was up 28.9% in 2019. US GDP was up 2.3%, not quite the growth seen in 2017 and 2018, but still pretty good from where we stand today. Our clients were pushing to get deals done, and 2019 was a great year in terms of overall deal activity and, in particular, sellside M&A.
Today, as we experience the world a few months into the global COVID-19 crisis, the news couldn’t be tougher. Goldman Sachs estimates a 34% decline in US GDP for Q2, with unemployment topping out at an incredible 15%. Other firms have made similar predictions. Brick and mortar retail, really anything “non-essential” that’s not on-line, has been shut down, in many cases by government decree. Companies are watching their cash like a hawk and making contingency plans that would have seemed inconceivable just months ago.
For the deal market, we’re in for some changes. Distressed M&A activity will pick up, as will the need for alternative sources of capital. Well-capitalized buyers will see once-in-a-career opportunities to consolidate competitors over the next 12 months. Creative financing sources are eager to deploy billions from new funds (Goldman is raising a $5 billion to $10 billion special situations fund) into what they see as a temporary dislocation in the capital markets. We’re anticipating more clients in our market who need $5 million to $50 million in equity or quasi-equity financing to fund acquisitions, restructure debt or just to keep the business going.
As we pull out of this shock (in either a “V” or “U” shaped pattern according to economists), both strategic acquirers and financial acquirers will be looking to re-fill their acquisition pipelines. Companies that take steps now to get their houses in order (think tracking the financial impact of COVID-19 to better prepare a pro forma of the impact, and engaging and preparing the next generation of leadership throughout this crisis) will be the ones best prepared to take advantage when the market bounces back. Owners of many healthy businesses, having managed through the ’08-’09 crisis and now working their way through another, may decide that the time has come for a sale. There are steps owners can take now that will help when the time comes for a sale transaction, whether that’s in a few months or a few years.
You know that tough times call for tough decisions. The right advice and the right partners can make the difference along the way.
Alan Fullerton is a partner with Mirus Capital Advisors. He works with owners of middle market businesses and can be reached at email@example.com.