M&A Approaches In A Volatile Deal Making Environment

Actionable Ideas for Companies and Sponsors

M&A Approaches In A Volatile Deal Making Environment

As a result of the financial impact of COVID-19, regular-way M&A activity will experience historically low volumes until the economic environment normalizes. During this period, we expect M&A activity will rapidly evolve to a range of transactions that will include the following broad themes:

  • Stock for stock mergers within industry verticals where relative ownership is the main driver, not absolute valuation of the acquiror or target.  These transactions will be driven by the even greater need for scale in this new economic environment.
  • Equity investments by companies and private equity firms to establish toe-hold positions in quality companies that need bridge equity capital but are not willing to sell at depressed values, and potentially providing a natural path to acquisition when valuations recover.
  • Sponsor-led acquisitions that are funded entirely with cash equity to eliminate the need for external financing and to capitalize companies with less leverage.  Acquirors pursuing cash acquisitions may also need to employ structuring tools to bridge valuation gaps, including earn-out structures in private transactions and contingent value rights in public deals.

While Activism Will Decline In The Near-Term, Companies Should Prepare For The Next Wave

We expect the number of activism campaigns to decline in the near term, given record level market volatility historically has served as a deterrent to new activist campaigns.  However, given the large amount of capital allocated to activist funds, we believe that once market volatility levels decline, we will see a robust return to historical activity levels and to a large universe of activist targets, given some companies will rebound slower than others.

While the critical near-term priority for all companies is to get their businesses returning to normal operating levels, advanced preparation for activism should also be a priority in order to mitigate the tactical advantages activists possess in this market environment. While there are many components to defense preparedness, some near-term key action steps should include (i) achieving alignment among Board members regarding a collective view on the company’s intrinsic value, and (ii) the adoption of an ISS-friendly short duration poison pill, or putting such a pill “on the shelf” for rapid adoption if a threat is perceived.  Several companies have adopted such pills over the past several weeks in response to their share price declines.