How the Pandemic Impacted M&A Transactions [PODCAST]

How the Pandemic Impacted M&A Transactions [PODCAST]

by Redpath and Company

The Covid-19 pandemic has affected many aspects of our personal lives. Likewise, business and industry have experienced impacts that have been damaging to some, while demanding substantial transformations from others in order to survive.

On this week’s episode of The Transaction Abstract, Joe Hellman spoke with Adam Webb, Managing Director of Quazar Business Brokerage to learn more about the impact of Covid on mergers and acquisitions. 

Until early 2020 when Covid-19 first appeared, the global economy had enjoyed eight years of growth that seemed poised to continue. The sudden, unexpected appearance of the pandemic changed consumer and workplace behaviors while many adjustments remain in place even through the end of 2021.

The Pandemic’s Initial Impact on Mergers and Acquisitions

Historically, mergers and acquisitions have been a regular part of a healthy U.S. economy. Broadening the customer base by merging the skills and technologies of the two companies is a compelling motivation that enhances the potential for greater market control of the newly united business.

By March 2021, after the pandemic had created substantial chaos and uncertainty in the marketplace and state and national governments, M&A activities stopped everywhere. Many business leaders preferred to take a β€œwait-and-see” approach.

Since so little was known about the pandemic, and the short and long-term impact on society, most business managers chose to maintain the status quo, not knowing what the coming months would bring.

The passage of the CARES Act brought some hope to the economy, providing much-needed financial support for all Americans to compensate for lost wages while bolstering businesses with an expectation of sustained demand for their products.

Many companies even enjoyed forgivable loans to maintain their payroll and employment levels.

Adjusting to a New Norm

Many of the M&A negotiations suspended earlier were revived by June of 2020, hoping that the pandemic would diminish due to the rapid development and introduction of effective vaccines.

As fears of a complete and long-term economic shutdown began to diminish, consumers and businesses adapted to a new normal with face masks, liberal sanitizing, and social distancing. Companies found new ways to sell and deliver while retailers started offering curb service and local deliveries. Online shopping exploded. To stay in business, restaurants, airlines, and sporting events reduced their operating capacity to allow for social distancing.

The outlook for more M&A activity grew as many businesses were able to adapt and maintain profitability. Companies positioned for a boom in online commerce like Amazon, FEDEX, UPS, and others experienced growth.

On the other hand, many formerly successful businesses experienced a severe downturn to the extent that current and future valuations were complex. Questions like β€œhow long will it take to return to profitability?” and β€œhow much of the lost market share is permanent?” weighed heavily on merger discussions.

Rebirth of M&A in the Second Half of 2020

From the middle of 2020, mergers and acquisitions broke out dramatically. Pent-up demand and eagerness to move on, even with lingering pandemic challenges, created a booming market for M&A activity.

A combination of the earlier government stimuli and the return of consumer activity brought about by the vaccines, boredom from isolation, and a general acceptance of the situation has accelerated M&A activity in 2021.

As expected, companies that experienced little or no negative impact from the pandemic are the most favorable for acquisition.

However, some companies enjoyed only a limited loss of profitability from shrinking revenues because of sharp reductions in their operating expenses like travel, wages, and office overheads. Whether the lost revenue was recoverable became an important question.

However, according to an October CNBC Report, M&A activity globally is likely to reach a record $6 trillion by the end of 2021 due to increasing confidence, reduced pandemic pressures, and low-interest rates, says KPMG.

By most measures, 2021 has been a good year for the overall U.S. economy. As of the second week of December, the unemployment rate has returned to near pre-pandemic levels, the year-to-date S&P 500 Index is still up 20%, despite recent drops.

What’s Next for 2022?

With the advent of new vaccines and other measures to fight the spread of Covid, the pandemic continues. In December 2021, another highly contagious Covid strain labeled Omicron appeared when business and life in 2021 seemed to have returned to a degree of normalcy or acceptance.

Uncertainty in the marketplace may be returning as many publicly traded companies watch their stock prices take some severe hits. At this time, some boards of directors are requesting that acquisition discussions be halted and postponed for now since their capital costs are increasing while their stock price is dropping.

A combination of elements has kept the business of M&A humming, albeit interrupted at the beginning of the pandemic. Still unknown is how new strains of Covid might impact consumer behavior, whether inflation will continue to gain momentum, and the level of interest rate movements the Federal Reserve may use to deter rising prices. Low interest rates have driven M&A for the past few years, and a marked increase will likely impact potential transactions, but the abundance of capital available may offset that impact.  Many experts are expecting 2022 to be a robust year in M&A.

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Redpath and Company

Redpath and Company

Redpath and Company helps clients make more informed decisions that contribute to their financial well-being by providing proactive, innovative, and value-driven CPA and advisory services for closely-held businesses, private equity, government entities, and nonprofit organizations. Core commercial industries served include manufacturing and distribution; construction, real estate, and engineering; and technology. Areas of service expertise include audit and assurance; personal, business, and international tax; state and local tax; sales and use tax; and succession and estate planning. Redpath also guides clients throughout the entire business life cycle with performance optimization and process improvement; M&A advisory, including corporate and deal strategy, due diligence, financial modeling, and M&A integration; accounting and management outsourcing; and valuations. The firm was founded in 1971 and is employee owned (ESOP). With offices located in St. Paul and White Bear Lake, Minnesota, the firm ranks as one of the top CPA and advisory firms in Minnesota. Redpath is a member of HLB International, a global network of independent advisory and accounting firms. For more information, visit www.redpathcpas.com.