M&A opportunities and challenges in the COVID-19 era
COVID-19 changed our world overnight as it quickly evolved from a global health crisis to a global economic crisis. Countries around the world closed non-essential businesses and pressed pause on their economies in order to stop, or at least slow, the spread of the novel coronavirus. A global pandemic was always going to be bad for some businesses, but for those organizations that went into the crisis well-capitalized, aggressively growing and knowledgeable about the nuances of their industries, COVID-19 quickly presented opportunities on the mergers and acquisitions (M&A) front.
A prime example came from the media sector when NordStar Capital, controlled by entrepreneurs Jordan Bitove and Paul Rivette, acquired Torstar Corp., the parent company of Canada’s largest daily paper, for $52 million—later increased to $60 million after a rival bid emerged. As reported in an article in the Financial Post, Torstar had been struggling to implement a digital transformation and increase digital subscribers. Coronavirus caused ad revenue to decline dramatically, further squeezing the media conglomerate’s already battered bottom line. This presented a prime opportunity for NordStar, considering that Torstar had no bank debt and a cash balance of $70 million at the end of the first quarter of 2020.
It’s still early days, and knowing exactly how COVID-19 and the economic downturn will impact M&A activity going forward is challenging, but international law firm Gowling WLG recently analyzed developments in the space during the Great Recession of 2007 to 2009, and predicts that activity will remain just as robust during this downturn. Citing research by M&A investment advisors Crosbie & Co., the firm reported that “there were still over 170 reported M&A deals in Canada in the worst quarter following the start of that economic downturn. By the following year deal volumes had substantially recovered to pre-crisis levels (1,132 reported in 2008, 927 reported in 2009 and 1,130 reported in 2010).”
In its Mergers & Acquisitions Report for 2020, Crosbie & Co. reported strong deal activity in Canada for the first quarter of 2020, with 797 announced transactions worth $47.1 billion. How subsequent quarters will fare is uncertain given the disruption caused by the pandemic.
Opportunities on the horizon
That said, an article in Forbes magazine posits that otherwise financially viable organizations operating across industries such as travel, transportation and oil and gas—all of which have been particularly hard hit by the pandemic—could be attractive to buyers looking for a bargain. Right now many businesses are available at much lower prices than they were six months ago, creating good opportunities for companies that are strategic and looking for vertical or horizontal integration.
The key to successfully executing pre-pandemic deals and developing new ones in the COVID-19 era will be to understand and prepare for logistical challenges—and there are many.
Chief among them is accessing third-party financing in the face of extraordinary volatility. Banks may be hesitant to lend in some cases due to widespread economic uncertainty and the bottom-line impact of everything from administering government-sponsored COVID-19 relief programs to absorbing loan default losses. There may also be issues over liquidity. If debt financing is available, the cost of that debt may be higher as lenders price in the cost of risk created by the crisis. The covenants may also be more stringent. And what happens if lenders aren’t able to provide the money necessary for a deal to close? What recourse will buyers have?
The level of uncertainty, particularly with respect to future cash flows, is also problematic. How do you confidently forecast with so many unknowns? How do you arrive at a valuation when it’s difficult to assess future earnings?
A buyer’s market
Motivated sellers under pressure in this buyer’s market may be unable to set the terms and structure the deal they want. Just as during the Great Recession, buyers have the leverage today. For example, material adverse change or effect definitions are typically part of acquisition agreements and include some sort of closing condition that effectively requires that no material adverse change has occurred across the business if the deal is to close. How will that term be defined going forward? Will COVID-19 be considered just such a change? Buyers will likely want this to be the case in order to be able to terminate or amend an agreement if a business is significantly negatively impacted after signing a deal and before its close.
Even the need for physical distancing will impact how due diligence and negotiations are conducted, or whether inventory or environmental assessments can be carried out at all. This could be even more challenging if we face a second wave of the pandemic in the fall, as is predicted. Additional due diligence is also likely as buyers will want to look at the degree to which COVID-19 has negatively impacted a prospective acquisition’s operations, finances, etc. All of this could delay the timing and execution of deals.
A shifting market landscape
What’s clear as a result of the current crisis is that many businesses are consolidating, which is likely to transform the competitive landscape going forward. Buyers looking to grow should pay close attention to the changes taking place in their industries today to assess the long-term viability of an acquisition.
It’s become cliched to call these times ‘unprecedented,’ but it’s no less true as businesses try to navigate the economic headwinds created by the global pandemic. But challenges also create opportunities for those able to seize them. For companies with strong fundamentals and financing, this could be the right time to make a deal.
Hartley Cohen, Partner