John Prior is CEO of Needham & Company, LLC, a globally recognized investment banking and asset management firm focused solely on growth companies and their investors.
You have seen countless developments impacting business cycles over the course of your career – how is this pandemic different?
From the first oil shock in 1973 through 9/11 and the events thereafter, the economic impacts of crises were primarily felt (and in several cases targeted at) the United States. Over the last 20 years, as economies have become interdependent, information travels at the speed of light and large sections of the global population have become more mobile, the severity of the crises and the potential for long-term damage has increased significantly. In 2009, when my college freshman son was diagnosed with Swine Flu, he was banished from his dorm room, campus and restaurants … for one week and stayed in the same hotel room as his Mom and sister. Today, they shut down the college, they shut down the state and they would have quarantined my entire family. The fear that has circled the globe for this pandemic is orders of magnitude higher than any other crisis in my lifetime.
What’s next for M&A for the rest of 2020?
The M&A environment for deals that were underway in Q1 will remain challenging for many reasons: many buyers are trying to unwind agreed upon deals, resulting in litigation from both buyers and sellers; for deals in process, limited visibility is hindering diligence; even when the diligence issues are satisfied, the closing processes have become complicated and require more time to complete; and foreign buyers must cope with a less favorable CFIUS panel. Strategic buyers continue conserve cash and have become extremely selective in their evaluation of potential targets. Private equity buyers have instructed many of their portfolio companies to focus their efforts internally to avoid defaulting on existing debt obligations.
For motivated sellers in this tumultuous period, what should they be doing now to enhance prospects for a meaningful transaction in the next 12 months?
Prospective sellers should focus on those levers that are within their control. Strengthen the assets that drive buyers to pay a premium: people, customer relationships, brand and intellectual property. Consider soft approaches to likely buyers to explore partnership opportunities. Develop a compelling rationale for why you are pursuing a sale in a historically poor deal environment. Prepare for a rigorous diligence process by increasingly skeptical buyers. Make sure that the cash balances are sufficient to get to a finish line that is further away than it was a year ago – sellers can no longer play chicken and expect a favorable outcome.