The Challenges and Opportunities of M&A in COVID-19

Recently, experts from Friedman LLP, HSBC, MMG Advisors and Morrison Cohen came together for a special webinar, M&A: Business Growth in a Time of Upheaval. Panelists explored the state of M&A amid COVID-19 – laying out a strategic roadmap for navigating today’s ‘new normal.’ Attendees were invited to join the conversation by responding to a series of polls, which led to a discussion about opportunities that didn’t exist before the pandemic and threats that make it difficult to plan.

Are companies focusing on growth or survival?

Everyone is looking toward a post-COVID world, whenever that may be. The goal for most is to come out stronger, but many businesses today may feel like they need to focus primarily on surviving.

However, surviving does not necessarily mean sitting on the sidelines doing nothing, says Matt Kaden, Managing Director at MMG Advisors. Instead, this is the time to be actively and strategically planning to grow your business. For 58% of those answering the group’s first poll, that means making an acquisition.

Harry Steinmetz, Partner of Charge in Transaction Services for Friedman LLP, says part of the challenge in this environment is determining how to assess which acquisition makes the most sense. "You need to have a clear strategy about how you’re going to acquire – whether it adds synergy, gives you a vertical advantage or adds some kind of capability of manufacturing throughput." Matt agrees, saying that every company is different so the approach will be truly individual, especially now. "The place to start is with a thorough evaluation of your own business." This includes looking at your strengths, weaknesses and risks to decide if you need to acquire a business or a capability set.

Randi Mason, Co-Chair of the Corporate Department for Morrison Cohen, says it’s not just about figuring out which acquisitions will best fit your growth strategy. "As we can see from the audience’s answers to the poll, people are reluctant to sell right now," she says. "Maybe the real challenge, then, is not just finding any opportunity, but finding the right opportunity in what I think will become a very competitive marketplace."

That’s certainly the trick, says Eric Fisch, Head of Retail for HSBC – deciphering what the sustainable brands are and what business models make sense. He believes companies should be looking at digital, especially if that’s a channel they’re missing. "People are becoming accustomed to buying online; it’s how they’re going to shop in the future," he says. "If you don’t have digital capabilities 10 or 20 years from now, even if the opportunities seem a little overpriced right now, you’ll be left behind."

What’s the motivation behind making an acquisition right now?

Harry says that many businesses today are looking at opportunities in the current atmosphere from more of a strategic standpoint than to financial. This was confirmed by 52% of respondents who said their primary goal in making an acquisition right now would be to expand their product or market reach over making a profit.

Again, the challenge lies in identifying those opportunities. Randi feels certain industries are relatively recession-proof and may be even more attractive as many people are still working at and staying close to home.

"Really anything that's health-related and that you can do for yourself without needing a practitioner to provide it seems to be doing pretty well," she says. "Home fitness, vitamins and other nutritional supplements, for example."

For apparel, Matt says that's anything activewear, performance, running shoes and the like. "From a category perspective, it's casual, it's comfort. People are buying for lifestyle, whether it's mass or up to luxury, they're buying differently."

Although gyms have been hurt by their inability to open, Harry says there is some movement in the M&A space. "There's a view that perhaps there is an opportunity there." Another potential opportunity, he says, comes from high profile bankruptcies of brick and mortar retailers whose e-commerce platforms might be stripped out.

Eric says diversification is also a critical consideration - particularly geographic diversification. He says companies with selling operations in various markets around the world may have fared better than others. That's because they could focus on economic activity in markets that began to open up even as others were closing down. "I think companies will continue to diversify to reduce that risk."

What concerns businesses about making an acquisition in today's environment?

For the audience, figuring out how to value a business during COVID is their biggest concern (43%). "At the end of the day, the valuation formulas are in question," says Matt. "We've all been struggling with multiples of EBITDA for legacy businesses versus multiples of revenue for direct to consumer brands – and there is no single case that will be indicative or set the new benchmark."

Randi agrees, adding that accounting for companies with an earn-out will be interesting in today's environment.

“Whenever we have documented EBITDA targets, there are certain add-backs to reduce earnings because they represent aberrations in the business,” she says. One of the things Randi says the industry is seeing now is one-time EBITDA deductions to account for artificial bumps in EBITDA, which may be due to factors being weighted too heavily in favor of a company due to COVID.

Poll respondents were equally concerned about securing financing and going through a second shutdown, the latter of which we have no real control over. In terms of obtaining financing, however, Eric does note we are in a tightening credit cycle. “Public companies are doing better because they have capital markets and government support,” he says. “For the private side, it comes down to bank financing – and I’d say banks are generally being more conservative.” Still, he says, banks have been very supportive of long time clients who are performing well.

Of course, the question is how you navigate the new complexities – whether challenge or opportunity. With experienced guidance, says Matt. “My short answer is this – bankers, accountants, lawyers are trusted advisers. You should rely on them.”

Learn how HSBC can support retail companies' plans for growth. Click here.

Learn more about Friedman LLP, an accounting, tax and business consulting firm serving public and private companies.

Learn more about MMG Advisors, a leading investment bank for middle-market consumer product, retail and fashion companies.

Learn more about Morrison Cohen, an international law firm with attorneys specializing in all areas of law including international arbitration, real estate, mergers & acquisitions, and more.

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