The COVID-19 pandemic has led to one of the steepest downturns in the merger and acquisition market in recent decades. In March and April of 2020, investors and businesses put a hard pause on transactions as they wrestled with uncertainty around global shutdowns and life with Coronavirus. This led to the United States’ merger and acquisition market dropping almost 90% during the second quarter of 2020, as compared to the second quarter of 2019. However, investors and business have started to get a handle on the “new normal” in recent months. These investors and businesses are now looking for deal-making opportunities. This is especially true in the private equity space, which is sitting on approximately $2.5 trillion in “dry powder” (funds committed by investors, but not yet spent or invested)—a record amount.
With that said, there still seems to be a gap between buyer and seller valuations, which is why mergers and acquisitions have not yet seen a resurgence. Buyers are looking for bargains, while sellers remain adamant that their businesses deserve pre-COVID valuations. This gap may start to narrow, as buyers may start to face pressure to expend their record amounts of dry powder, and sellers either stabilize their businesses or face the reality that an influx of new capital is necessary to sustain their businesses. As a result, the fourth quarter of 2020 is primed for a surge of mergers and acquisitions across Florida and the rest of the United States—especially given the historically low interest rates and the fear that business-friendly tax laws could evaporate in 2021 under a Biden administration and a Democrat-controlled Congress.
Transactions that could noticeably increase in the fourth quarter of 2020 include: (1) strategic transactions, which are transactions that generally offer the buyer some sort of additional value or synergy to such buyer’s existing business (for instance, roll-ups of a particular type of business, such as delivery services); (2) transactions that are designed to infuse new capital into a “semi-distressed” business to help the business “ride out” the pandemic and eventually rise post-
pandemic; and (3) transactions to buy companies that have thrived during, and are somewhat insulated from the effects of, the pandemic (for example, certain home improvement and gaming products).
Wherever you fall on the spectrum—whether thriving or struggling during these uncertain times, or looking to buy, or to be bought, in a strategic transaction—every business owner should consider whether now presents the right opportunity to strike a deal. With so much dry powder, low interest rates, potential changes in the political environment (notably, tax laws), and more confidence in the market from investors, the fourth quarter of the 2020 is rife with opportunities.
If you are a business owner looking to seize an opportunity for a transaction before the end of the year, beware that time is of the essence. Start mobilizing your business and legal advisors and preparing for a transaction, so that you are ready for the wave of mergers and acquisitions in the fourth quarter of the 2020 calendar year.