As the coronavirus pandemic continues to bring much of economic life to a halt, companies across the UK are reassessing their growth plans. But for those entrepreneurs and business leaders who were looking to acquire or sell a business, what does the future hold?
To get a better idea of just how deep the impact of the pandemic will be and how businesses can respond, we spoke to John Farrugia, Partner at Cavendish Corporate Finance – the UK’s leading sell-side M&A specialist and part of finnCap Group, who advise ambitious growth companies on accessing capital and how to promote their stories across public and private markets.
To begin with, just how bad do you think the economic impact of coronavirus will be?
Tragically – not least for so many good businesses – the impact of coronavirus runs much deeper than simply a temporary slowdown. The first thing to realise, therefore, is that the recovery is likely to take longer than after a typical recession or credit crunch. Indeed, in my view the current crisis is much worse than 2008: rather than banks going under, good businesses that were solvent six weeks ago are now struggling to keep their heads above water.
What that means for M&A activity is that there will be a slowdown in deal flow – first due to the practicalities of a process in lockdown and then because of the effect on businesses generally. However, it doesn’t mean that M&A will disappear completely. Indeed, businesses should remember that M&A activity was already slow in recent years thanks to Brexit uncertainty, so many companies have been biding their time before buying and selling for quite a while.
The important thing to remember is that given the long tail of the current situation, advisers involved in M&A will need to observe how well individual firms recover over the next six months to a year, in order to accurately judge their viability.
So a long slog to be sure, but it underlines the importance of making sure your business is as well-run and efficient as possible. Indeed, now is the moment to make sure you take a proper look at the organisation and what you want it to be – something that you might have been putting off.
How has the pandemic affected entrepreneurs looking to sell-up?
On the trade side of things, deals will likely mostly consist of opportunistic purchases by big international companies with resilient balance sheets. So, actually, if you are an entrepreneur who has developed a rather niche business, you might find that that there is still interest (and capital) being directed at you.
By contrast, however, debt markets have been particularly badly hit by the pandemic and selling to private equity will be a lot more difficult.
Most banks are just not ready to lend to private equity firms at this moment in time: they are concentrating on helping their existing portfolio of clients, whilst also scrambling to adjust to the terms of new Government loan schemes.
Indeed, private equity firms are in a similar position – they are focused on guiding their existing portfolio of companies through the crisis.
And one other thing to remember – with leverage around 1.5 to 2x (similar to 2008, in fact) valuations are very likely to drop, as private equity funds will be unwilling to front the costs usually covered by banks. And even if they do actively seek new opportunities, they will proceed very cautiously.
Are there any sectors which you think might fare better or worse in response to the pandemic?
A lot of my focus is on the technology sector, and so I’ve been really interested in how the pandemic has affected this industry in very different ways.
To begin with, since many investors look to maximise returns on their investment rather than keeping struggling businesses afloat, business models which offer strong future growth still look likely to fare reasonably well in the current crisis, as a general rule.
Moreover, given then huge shift to remote working, many software providers – particularly those offering business critical products – should be relatively okay. The recent Zoom Technologies / Zoom Video mix-up – where investors piled in to buy stocks of the former, Chinese technology company, mistaking it for the latter, working-from-home-essential video service – certainly demonstrates investor appetite for lockdown-resistant software.
However, whether customers will continue to pay their monthly license fees could be a concern for many Software as a Service providers (and their investors) in the longer term.
So what’s your advice for companies at the moment?
Obviously many companies are just in survival mode at the moment, and so of course that has to be the primary focus. But for entrepreneurs looking at M&A as a route forward in the medium term, I would seriously suggest that they consider retaining an adviser.
That’s because a good adviser – who has plenty of experience – knows what needs to be done to a business to make it transaction-ready. And if you choose the right one, they will be well-equipped to advise on what you should be doing to get a company back on its feet.
How are Cavendish and the wider finnCap Group responding to coronavirus?
finnCap’s capital markets team is very active in response to the unprecedented impact of the pandemic. That side of the business is responding well to current conditions, helping to secure three deals in one week at one point – deals that simply weren’t there just a few weeks ago, where companies have strengthened balance sheets or raised money for coronavirus related activities.
We expect this side of the business to continue much in the same vein. Indeed, finnCap Managing Director Stuart Andrews has noted that many public market institutional investors have emphasised to us that if businesses need equity, then they want to provide that and the recent number of public equity raises demonstrate this.
And although private equity houses are reticent to make purchases at the moment, Hugo Lough and his private fundraising team within finnCap have highlighted that family offices are open to funding businesses, and our debt advisory team are involved with those strengthening balance sheets.
As for Cavendish – as the sell-side M&A specialist part in the finnCap Group – venture capital and family offices will be important sources of funding for our clients, if they require an injection of capital prior to a sale. So, although deal activity flow may decrease for a period, we will still be busy advising clients on funding, leverage and their finances more generally.
