Steven H. Nigro, Managing Partner of TAG Financial, reflects on How The Covid-19 Pandemic Is Reshaping Mergers And Acquisitions at Forbes.com
Experienced strategic and financial investors are no strangers to crises, having navigated through several, from the 1987 stock market crash to the 2008 financial crisis. When the Covid-19 pandemic hit, those with long tenures in the industry had the advantage of experience, but only to an extent—because this pandemic created a real sense of panic, and there was no playbook for it.
In discussions with investors, and having experienced three significant previous crises myself (starting with the stock market crash of 1987), I’ve observed a common theme. Crises present either volatility, a market disconnect or interruption or a lack of supply and demand of transactional capacity. Covid-19 caused volatility and a market disconnect but didn’t drastically diminish a supply of capital or demand of transaction activity.
There is no doubt that the pandemic slowed down mergers and acquisitions. There was a pause and, indeed, disruption. However, the pandemic didn’t wholly halt transaction activity, and in fact, the environment rebounded quicker than feared or anticipated. And while what’s true for my sector might not translate to others, from what I’ve observed the past year, some broader influences and trends give reasons to be optimistic about the future of mergers and acquisitions.
Bracing For An Initial Slowdown
When the pandemic hit last March, my firm, TAG Financial Institutions Group, braced for a slowdown. We are an investment bank that specializes in mergers and acquisitions in the lower middle market. We focus on transactions with private companies, and we specialize in the financial and business services sectors. At the beginning of the pandemic, we had our hands full with over 20 transactions in various stages of the acquisition process.
It didn’t take long for buyers to start hitting the pause button. March and April results declined, and investors began to contemplate the future and their strategies. But, interestingly, for every buyer who hesitated or withdrew, there was at least one other who wanted to capitalize on the pandemic-induced volatility. Ultimately, my firm saw activity pick back up, leading to an impressive rebound where we closed 16 transactions between March and the end of the year.
Why Mergers And Acquisitions Activity Carried On
The fact that mergers and acquisitions activity carried on was due to a combination of three factors, some of which were bubbling up long before the pandemic: an abundance of investment capital, the dynamic of opportunistic buyers and eager sellers and the evolution of merger and acquisition transaction process mechanics.
First, with high investment capital levels, strategic and debt investors sponsored by private equity were willing to pursue transactions even mid-pandemic opportunistically.
According to Preqin, entering 2020, private equity and private debt dry powder were at all-time highs of approximately $1.4 trillion and approximately $270 billion, respectively. By the end of the first quarter in 2020, those figures rose to roughly $1.5 trillion and roughly $301 billion. It is likely that these record levels of dry powder and the pressure to deploy played a significant role in supporting mergers and acquisitions activity and prevented a much less pronounced decline.
Second, with a significant amount of pent-up demand and company leaders grappling with the realities of the virus’s impact on their businesses, many expectations were revised. Sellers decided it was time to minimize risks and sell.
The 2020 presidential race also played a role. Many presumed that under a Biden presidency, the capital gains tax rate would increase. Sellers were faced with balancing two factors—potential lower valuations due to the down months they’d faced during Covid-19 and what the after-tax net proceeds would potentially be under the Biden administration. This motivated sellers to get deals across the finish line by the end of 2020.
Suddenly, there was a combination of motivated sellers and experienced buyers who’d gone through previous crises and were doubling down and jumping at opportunities. This dynamic fueled activity among these opportunistic buyers and anxious sellers.
The third contributing factor that buffered deal disruption was the evolution of closing and integration mechanics. There was a time where due diligence was done in person and transactions closed in well-appointed law firm conference rooms.
Technology had already changed much of that pre-pandemic, but the pandemic further accelerated and solidified the shift toward an almost total reliance on technology. With the already widespread use of virtual data rooms, video conferencing technology and collaborative software, the quarantine didn’t hamper acquisition processes. Advisors, lawyers and other key players were already accustomed to doing these tasks over calls.
Moving forward, they’ll rely on these digital tools even more. Had the pandemic happened two decades ago—a time when due diligence worksheets were in carefully organized binders, and transaction closings took place in well-decorated law firms—quarantine would have caused things to come to a jarring halt.
What The Future Holds For Mergers And Acquisitions
While we’ve navigated these rough waters so far, a question remains—what happens now?
Many of the transactions that closed in 2020 originated before the pandemic. To originate and close those transactions, investment bankers had hopped on planes and courted clients face-to-face. For us, being in Manhattan provided the perfect entertainment “home-court advantage.”
Sellers bonded with buyers at meetings and dinners, solidifying personal chemistry. Recently, a client asked me for a gut check on the deal they were about to close. I spoke confidently about valuation, structure and timing, but then, since he had never met the buyers, I asked a simple but important question: “Do you like these guys?”
Perhaps in-person meetings won’t make a complete resurgence after the vaccine has been widely distributed. Some people, like myself, are eager to embrace formality again. I graduated from college in 1982 and wore a suit and tie until March 12, 2020. I’m looking forward to the day I can look prospective clients in the eyes again and try to convince them that I’m the right person to advise them on what is likely the most important transaction of their life.
However, from my informal observations, that sentiment is split relatively evenly. Some of my peers are questioning if going to offices and traveling through the sky will be necessary. Maybe they’re right; doing those things might not be required anymore. And so it is that the pandemic has created dual realities for the mergers and acquisitions world. Some in the industry will adjust to this new way of doing business–no more travel, no more offices and no more entertaining. As for me, I think I’ll put my tie back on and get back out there.
This Post is for informational purposes only and does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities. While the information provided herein is believed to be accurate and reliable, TAG Financial Institutions Group, LLC and Ashland Securities, LLC make no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person. Certain Principals of TAG Financial Institutions Group, LLC are registered representatives of Ashland Securities, LLC Member FINRA, SIPC. TAG Financial Institutions Group, LLC and Ashland Securities, LLC are separate and unaffiliated entities. Securities and Investment Banking Services are offered through Ashland Securities, LLC.
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