Many of our clients have contacted us to get our views on how the market has changed because of COVID-19.
During the current crisis, we have maintained constant dialogue with acquirers of businesses, covering major international and national groups, investment funds, private equity and family offices. We also talk to banks and other providers of working capital. Our reach includes Australia, New Zealand, North America and Europe.
Market Impact on Valuations and Process
In summary, the market has changed. But it is important to understand how and the impact this is having on valuations and process.
Our view is that strategic acquisition activity is holding its relevance and value to acquirers. Whereas financial acquisitions are either on hold or being re-valued. If you are unsure about the difference, here is a summary:
- Strategic – put simply, the fit is more important than the profit. Long-term value to the acquirer is derived from how the acquired business fits within their existing operations. E.g., adds more capability, markets, depth, clients, leadership, management, diversification, quality, expertise, intellectual property, competitive positioning, etc. Given that competitive intensity in leading sectors is relentless, an asset that gives an edge remains valuable. It is important to note that strategic acquirers can also include private equity funds, where their existing investments are complemented through further acquisitions.
- Financial – it is about profit, cash flow and IRR. Long-term value is considered in terms of a future exit to generate a capital gain to the acquirer.
Sectors with M&A Activity
So, what are we seeing?
Major international and national engineering and IT services consulting and advisory firms are still seeking strategic acquisitions. Core areas of focus have not changed, such as infrastructure, resources, urban planning and adjacencies. Yes, there are changes in focus due to the Covid-19 crisis, as areas such as hospitality and leisure cool, and supply chain and related technology heat up.
We are also seeing companies looking to source additional debt to bolster their balance sheets and make ‘attractive’ acquisitions while they can.
Finally, we are also seeing some activity from financial investors to supplement existing investments. But generally financial investors appear to be waiting. More to preserve their cash reserves than use it for predatory acquisitions (fire sale purchases).
Stricter Due Diligence Expected
So, what has changed?
Acquirers will be tougher on due diligence. Whilst we don’t see valuations necessarily falling, we do see due diligence becoming more diligent as acquirers dig deeper to understand the value drivers of a business, its sustainability and resilience. We don’t see this changing for, at least, a couple of years.
For owners who had set 2020/2021 as their target date to implement succession or sale, our advice is don’t change your plans. Just be better prepared and remain confident.
If you would like to discuss your plans and get greater clarity, please contact any of the Eaton Square Principals. You may book a call here.
Global Managing Principal
Reece Adnams is the CEO and Global Managing Principal of Eaton Square, a Mergers and Acquisitions and Capital Services advisor for technology, services and other growth companies founded in 2008.