Assumptions – Damage period
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The next four waves of mergers and acquisitions (M&A)

Our current and prospective clients are currently asking for guidance on the outlook for the M&A market. Given the rough seas created by COVID-19 in the U.S. economy, we believe that the next phases of M&A may possibly occur in four, potentially overlapping, waves.

Wave one

The first wave of M&A will come from deals that are currently underway. These are deals that were launched before the end of the first quarter (Q1) of 2020 and were in process when the U.S. economy began to shut down in response to COVID-19. We expect that a number of these transactions will begin to close over the Q2 – Q4 2020 period for companies that have been relatively unaffected by COVID-19. Many of these processes may have been paused temporarily, but the majority have since resumed or will be resuming in the next couple of months. Most, but not all, of these transactions will have lower leverage and potentially lower earnings before interest, taxes, depreciation and amortization (EBITDA) multiples compared to deals closed in 2019.

Wave two

The second wave may largely be driven by distressed M&A and non-core divestitures. These deals— expected to be completed in the second half of 2020 and in 2021— will be a result of companies that have been meaningfully damaged by COVID-19, are over leveraged, or lack sufficient liquidity. These transactions will most likely be completed at bargain prices and may involve existing creditors and equity holders taking a cut to their respective stakes to get a deal done quickly to generate cash proceeds. Most acquirers will be strategic buyers (including private equity platform companies) that have liquidity and the ability to integrate, or cut costs. They may also be distressed private equity buyers that specialize in turnarounds or special situations. Companies that simply need access to additional capital will be more likely to secure buyers than those that are insolvent or whose business models will be experiencing longer-lasting impacts of COVID-19.

Wave three

The third wave will be led by companies that performed well during the COVID-19 downturn and will be in the market in late 2020 into 2021. Most of these transactions will involve companies that had already hired investment bankers, but delayed initiating a sales process with the onset of the U.S. economic shut down. Other companies may have been considering a M&A process and the impact of COVID-19 will spur owners to hire a banker to sell the business.

Wave four

The fourth and subsequent waves will bear some semblance of a return to normal. Companies that were affected by COVID-19 will have returned to sustainable revenue and earnings before interest, taxes, depreciation, amortization and COVID-19 (EBITDAC), and will begin pursuing a sale or liquidity event. This wave will include family businesses and private equity firms selling portfolio companies such as in ordinary times.

How to navigate the waves

As with all macro-economic events, the size, frequency and duration of these M&A waves will remain unpredictable. However, companies can chart their course to a successful transaction closing by working with experienced and strategic, accounting, tax, consulting and investment banking advisors.

For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.

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Michael Milani
Executive Managing Director, Principal
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