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Cash Deals Are the New Rule in Coronavirus Era M&A

Cash on the barrelhead” means no credit and immediate payment. It’s cash upfront or no sale. Cash deals are the new rule.


Although the private credit markets are working, it looks like financing for new middle-market deals is on hold as Covid-19 continues to disrupt the global economy. As a result, it’s cash on the barrelhead.


One company that helps companies fund themselves when cash is tight is being funded, and working capital lines are available, one large market private lender told Barron’s. However, there’s no funding available for M&A cash deals. “There are no new deals to fund,” the lender told the publication. 


First Quarter M&A Numbers Bleak


The funding halt follows on the heels of the now constant COVID-19-related volatility. This uncertainty has seen M&A in the first quarter slow to a drip. Globally, M&A volume was down 24% to $621.5 billion spread across 8,465 deals as of March 20th.


Unfortunately, U.S.-announced transactions have an even worse showing: volume for U.S. deals has tumbled 57% to roughly $203.2 billion for 2,307 transactions. 


One expert opined that the private credit market isn’t suspended, but rather investors are somewhat hunkered down to evaluate risk. Investors are searching for value using cash deals and moving through their entire process of repricing risk and investigating specific opportunities. 


While transactions that are inked and subject to a binding agreement may have little to no wiggle room in which to renegotiate terms, sellers with deals that were in process and not completed may reevaluate those deals and decide whether to move forward.


For example, pending M&A transactions are being abandoned include Xerox recently dropping its $34 billion offer for HP. This followed after postponing meetings with HP shareholders to focus on coping with the coronavirus pandemic. Also, SoftBank ended its $3 billion tender offer for WeWork shares, explaining that the coronavirus impact along with the failure of a number of closing conditions.


COVID-19 Crisis is an Opportunity for Cash Deals


The coronavirus crisis and resulting economic downturn presents an opportunity for buyers with cash. Those private-equity firms with holdings estimated at $1.71 trillion, still have the option to shop. However, there don’t appear as of yet to be a flood of distressed assets coming to market. Although the move is likely, it has not yet presented a series of opportunities for investors that have been counting their coins and waiting patiently.


Private equity funds that can do preferred equity or debt with warrants are signaling that they’re open and ready to put capital to work with cash deals. 


Another M&A observer, a finance partner at a Manhattan law firm, doesn’t believe that the private credit market is on pause. Instead he says they’re taking a “collective breath.” The difference is that with a deep breath, “there is still movement on deals,” the attorney explains. With a pause, “pens are down” and parties may postpone discussions for some time, he said. 


Certain Industries Impacted More Than Others


Marketing and Advertising Services


The marketing and advertising services industry saw activity drop, but recently NBCUniversal’s Fandango announced that it was acquiring streaming video platform Vudu from Walmart. This evidences that there are still opportunities, particularly in areas like digital media where there is growth in user consumption as more people stay home. But the pandemic has hit the industry to make deal-making more challenging, especially as volatility in stock and debt markets slashes valuations of businesses and limits financing to cash deals. Advertisers continue to cut spending as they deal with major disruptions in every part of their operations. Their spending on media, creative services, technology, and data provides the financial driver for thousands of companies in the industry.


Hospice


As expected, the coronavirus has had little impact on hospice mergers and acquisitions, at least in the short term. There were 15 M&A transactions in Q1, one more than during the fourth quarter of 2019 and seven more than during the first quarter of 2019, according to a new report from the post-acute M&A advisory firm Mertz Taggart. The hospice M&A market is being driven by demographics and the past availability of capital. There were more than 10 transactions of $250 million or more in total enterprise value occurred between 2016 and 2018, according to the investment firm Cain Brothers and Company, LLC.


Cybersecurity


And the cybersecurity industry enjoyed a robust pattern from the first half of 2019 into the second, and it continued into the first quarter of 2020. Analysts says that bigger security businesses are broadening their product portfolios with new technologies. Several private equity firms are making significant cash deals by investments in security companies, which is a key trend noticed in the first few months of the year. Cybersecurity deals in 2020 have ranged in focus from threat protection to enterprise IoT. For example, Symantec sold its cybersecurity services business to Accenture in January, and the same day, private equity firm Insight Partners acquired security company Armis for $1.1 billion. And at the end of February, Dell sold RSA to Symphony Technologies for $2.1 billion.


Image attribution: Liberal Dictionary.

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