Although we are in a period of turbulence and paralysis caused by the Covid-19 crisis, the M&A world will be revived in a few months and will do so vigorously.
Below, I describe the ten engines that will drive the buy and sale of companies from September this year:
1. Ten thousand private equities funds have raised capital and have seven billion euros under management. Private capital fundraising posted a banner year in 2019, with $888 billion raised, being the most private capital ever raised on an annual basis. They cannot pay them back and have an urgency to invest that money. If not, they will not be able to raise new funds. Time is against them, so the crisis generated by the coronavirus will not stop the buying and selling of companies.
2. More than a third of business owners in the developed world are of retirement age and continue to accumulate years. Many of them have no succession and need to sell.
“Ten thousand private equities funds have raised capital and have seven billion euros under management”
3. This unexpected crisis has made many business owners realize how dangerous it is to have all their eggs in one basket, and how any unforeseen event can take away all their assets.
4. The fat injections of liquidity by central banks will give economies a further boost.
5. Healthy companies will capture this liquidity and use it to make acquisitions.
6. In this crisis of the Covid-19, we are seeing more conflicts of interest between partners, who are facing each other because they have different perspectives on how to deal with the situation.
7. Companies are reviewing their internal organization, will divest of non-core units, and bring production closer to home by acquiring local competitors.
8. Telemedicine services, online education, e-commerce, and virtual communication will be preferred targets for acquisitions, given their need during the current situation.
9. Buying opportunities will arise in distress in energy, leisure, retail, and other sectors, mainly affected by the crisis.
10. Since the coronavirus crisis is temporary, and it affects all industries, investment bankers will normalize the company results in valuations, isolating the effect of the temporary disruption, which will facilitate transactions at reasonable prices.
Companies will have made cost adjustments and optimized their capacities, learning to work more flexibly and efficiently, which will increase their attractiveness.
Many companies are in a mid-size, laking the economies of scale of large businesses, nor the flexibility of the small ones.
We are experiencing a wave of accelerated concentration in most industries. The first M&A transactions in the sector or sub-sector are usually made at higher multiples. Prices fall as concentration proceeds, as also do profits of those left out of the process. Also, because the appetite for buying is already satiated, there are already fewer buyers, as the size is no longer a necessity for them.
With so much money in private equity, there will be a unique opportunity for those business owners who want to incorporate a partner and lead an industry consolidation.
“Companies will have made cost adjustments and optimized their capacities, learning to work more flexibly and efficiently, which will increase their attractiveness.”