M&A In The Age of Covid-19: FAQs (Part 1)

Since the start of the outbreak in March 2020, Hampleton Partners has provided tech business owners with regular webinar updates regarding M&A prospects in the age of Covid-19.

In this blogpost, we have compiled some of the questions frequently asked in our webinars.

Circumstances are still uncertain at present. If you are planning to go to market in two to three years’ time, it’s hard to say whether markets will have fully recovered in terms of valuations by then. One thing’s for sure, however: there will be an M&A market, as deals always find a way of happening. The more important question is whether valuations will hit the same astronomical levels we’ve seen across some sectors in the past few years – and for now, it’s too early to say.

You can start preparing now. There is no reason to “wait for this to be over”. Now that the worst has passed in terms of market crashes, you can prepare now on the basis of your 2020 financials and with a view to transacting in 2021.

In general, you should ensure you have enough cash, as sooner or later a buyer will inspect your books during a due diligence process. If you don’t have cash now, you should convince your investors to provide you with it, so that you can get comfortable in a position where you want but don’t need to sell.

If you are in conversations with advisors, this will help you go to market when you need to – that transition can be quick.

During Y2K [when people thought an issue with clocks and programming going into the year 2000 would cause electronics to fail and the world to end], we saw similar issues, with buyers pulling away due to the uncertainty. In retrospect, a number of those deals did eventually go through six months later and at much higher prices after both parties had “waited it out”.

Our key piece of advice would be to hunker down, run your business and try to relax. Transacting a further six or twelve months down the line is not fundamentally a problem.

If you have no choice but to sell immediately, enter into negotiations and see what you can work out – perhaps adding a longer-term earnout to bridge any sort of valuation gap that might exist due to the circumstances.

For this question, it is important to distinguish between strategic and financial buyers. 

Strategic investors have been forced to take a step back and examine their own situation. They are figuring out whether and how to "digitise" their activities themselves. So, either they are looking for the next acquisition to help them adapt in this respect; or – and this is the most likely scenario – they are looking inward rather than outward or at M&A activity. Indeed, forking out a few dozen million for a digital target can be difficult to justify if you have also just furloughed 10,000 people and laid off a few more, or if you've had to shed various other overheads. However, if they are looking at M&A, they will be more selective, not as prolific, and more careful with their bidding.

Financial buyers are quite the opposite. They are very active. They have accumulated a lot of "dry powder", as their investors have committed a lot of funds over the past few years. The financial buyers must double or triple their funds within ten or so years, so they continue to invest (although their investment boards may be more scrupulous or cautious during these times). Digital models are well-positioned to deliver the returns on the money in the financial investors’ funds.

Financial buyers may be taking more time to browse through companies which they would have competed over with strategic buyers. However, competition will no doubt come from other financial buyers, and this could lead to higher valuations in the long run. 

In terms of overall valuation, we will have to see what the short-term impact here is, but there is market interest and competitive bidding going on for sure. Simply, the makeup of the buyer pool is different.

Once you have found a good buyer or investor fit, the big corporate finance question is, “How much will I be receiving on the day I sign the purchase or investment agreement?”. The second question is, “How much will I be receiving the future depending on predetermined successes?”.

Buyers could, for instance, add a clause relative to sales, EBITDA or growth goals based on which you would receive an earnout. This might tell you a little about what they are willing to commit to, because no-one can predict exactly whether the growth or sales goal in question will be reached over the next 12 or 24 months. As such, earnouts might be difficult to establish or agree upon.

Contact Hampleton Partners for a confidential conversation regarding any of your merger and acquisition or corporate finance needs with one of our Directors or Sector Principals: https://www.hampletonpartners.com/contact/.

Hampleton Partners is at the forefront of international mergers and acquisitions and corporate finance advisory for companies with technology at their core. Hampleton’s experienced deal makers have built, bought and sold over 100 fast-growing tech businesses and provide hands-on expertise and unrivalled advice to tech entrepreneurs and companies which are looking to accelerate growth and maximise value.

With offices in London, Frankfurt, Stockholm and San Francisco, Hampleton offers a global perspective with sector expertise in: Artificial Intelligence, Autotech, Cybersecurity, Digital Commerce, Enterprise Software, Fintech, Healthtech, HR Tech, Insurtech and IT & Business Services. 

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