02, SEPTEMBER

More cautious and prudent strategic buyers, others looking for opportunities. Sellers who are waiting for better times, others who need to sell. Companies are valued differently and payment methods are structured differently. The COVID changed almost everything, and M&A operations are no exception.

By Eugenio Micheletti* for staffingamericalatina

When the alarms regarding the Covid-19 went off, and the closure of activities, mandatory quarantines, reduction of production and collapse of health systems made it clear that the impact on the labor market was going to be significant, the activity related to acquisitions paused, as all those involved in these processes needed more information to analyze what the economic consequences would be, the background of the crisis, the capacity for recovery, and the changes that the pandemic would eventually consolidate in the world.
As of March of this year, in general terms what happened was the following:
Buyers in general first had to analyze whether the financial resources they had allocated to acquisitions could be maintained or whether they should be reallocated to internal restructuring, working capital financing, severance payments and/or operating losses.
Specifically, strategic buyers, that is, those whose purchases are related to an expansion strategy (whether geographic, by specialties, by service mix, or linked to the development of new technologies), have put the processes underway on hold for a few months, resuming them only as of Q3 2020, and moving on to the first half of 2021 those that were budgeted to be completed in the second half of 2020. Even in advanced processes (post-signature of LOI or MOU), these buyers waited until there was some more clarity in the short-term scenario (2020/2021).
On the other hand, “opportunistic” buyers did appear, with the intention of incorporating to the portfolio companies that are in difficulties, and that are served by a majority partner, or directly sell and avoid the efforts that will imply the recovery of the operations to pre-pandemic levels. Always taking advantage of a “supposed” decrease in the value of the companies.
If we analyze the selling part, those players who were going through an “exit plan” (what we call “Strategic Sellers”), also put on pause because the generalized decrease in sales, added to the increase of risks associated to the context, meant a decrease in the Company Value. At the same time, those companies that refused the idea of evaluating sales alternatives, seeing an extremely complex and uncertain environment, began to open up to proposals from active investors.
Although it is clear that the market “belongs to the Buyers”, which means that they have greater negotiating power due to the conditions we have already mentioned, this does not mean that everything is translated into a lower Company Value.
Elie Azar, CEO of the private equity firm White Wolf Capital LLC, in a conversation with Akasha Taneja (see his article published in LinkedIn on August 6, 2020), mentions a term that seems to me to be very appropriate: EBITDAC, in reference to Earnings Before Interest, Taxes, Depreciation, Amortization and COVID-19. It is clear that all “extraordinary” circumstances affecting company performance must be considered in company valuations, and clearly this pandemic is an extraordinary issue. It is true that no one guarantees that businesses will return to pre-pandemic “normality”, but when the economy adjusts to the new reality, turnover levels will be lifted off the floor to resume growth levels. This is why we must adjust the 2020 results, put more focus on possible future scenarios, and increase the part of “earn out” that was normally negotiated between the parties. Valuing by multiples may seem simple, but it has particularities that can substantially change the value of companies for more and for less.

CONCLUSIONS:

The pandemic changed the logic of acquisitions in the region and the world, causing many players to make decisions contrary to what they had planned for 2020/2021. This creates opportunities for buyers and sellers that are certainly different from those that were previously apparent. Knowing how to detect those opportunities (not to confuse opportunity with expectation of “low values”), and above all determining fair values for Earn Out to remove uncertainty for buyers and “reward” sellers for return on investment, can be very attractive for the whole market.

*Eugenio Micheletti is Director of Emerging Staffing Brokers – emicheletti@emergingsb.com