The impact of COVID-19 on business valuation – Interview with Francisco Duato, Partner of ONEtoONE Corporate Finance

Francisco Duato, Partner of ONEtoONE, interviewed for Capital & Corporate, tells what are the changes that are going to occur in the M&A sector due to the pandemic, mentioning the most affected sectors, as well as the main opportunities for investors.

The COVID-19 crisis has forced many companies to adapt to the new situation. According to Francisco, the ability for innovation and digitization make it visible which sectors can continue to be interesting for investors and which ones cannot. Although the impact of COVID-19 on the M&A sector cannot be evaluated yet, operations show falls in the price of assets, according to current data.

The impact of the crisis on valuations:

Duato first indicates that, as a consequence of the pandemic, non-essential and essential activities suffered drops that have never been seen before, negatively influencing the companies’ valuation. Besides, the advisers still do not have visibility of the evolution of prices and valuations, since all this will depend on the effect of the second wave that is beginning now and will extend into autumn.

“The entrepreneur has to do his best to preserve the value of his Company, and M&A advisors have to sharpen the imagination to transfer most of the value to the transaction price,” explains the ONEtoONE’s Partner.

The advisors’ goal is to find a reasonable and satisfactory price for the seller and the buyer as well, and in this situation after the first wave of Coronavirus, this price may vary. However, if a company’s fundamentals were good before the pandemic, and they remain so in the new scenario, this should not penalize the valuation and the company’s price.

Read more about how to value a company.

Change in deals in the M&A sector due to the pandemic

Duato comments that depending on the sector operations will fall, and others will be redefined. In affected sectors we are going to see many mergers of companies with high operating leverage.

In our Partner’s opinion, the most difficult part of the consultants’ job today is quantifying the impact of the pandemic on the different companies. As a solution, we have to focus on the strategic sense of operations rather than finances. The strategic decisions taken from now on will affect how the company gets out of this complicated situation.

Also, if we focus on making decisions about deals that had already started before the first wave of Coronavirus, it is a legal challenge. On the one hand, buyers protect themselves with Material Adverse Change (MAC) clauses, and on the other hand, sellers want to maintain the same price before the crisis.

The new situation has changed the decision-making process of investors, Duato adds. Now, when looking for opportunities, it is essential to know which sectors are of interest in this new scenario. Furthermore, not only must we take into account in which sector the company operates, but also to whom it sells.

Which sectors will see their valuations most affected?

According to Francisco, during the pandemic, large technology companies such as Amazon, Google, Apple, and Facebook have achieved outstanding results. Technology has allowed the digitization of companies and users, which has been fundamental in this crisis.

“Technology companies that know how to do well in cybersecurity, cloud services, artificial intelligence, collaborative software, internet, health or e-commerce, among others, will be clear winners, ” Duato says.

However, the tourism sector was the clear loser in this pandemic. Despite this, companies in this sector have a high potential for recovery, and because of this, experts advise keeping these assets.

Market opportunities

“The Covid-19, among other effects, has drained the liquidity of companies. In the first instance, the CFOs have focused on preserving the cash by resorting it to officially supported financing lines, but those that have survived this first challenge are facing a new one: solvency management. “, Explains Francisco

Liquidity is the ability to meet short-term payments and is related to the proper management of cash flows. However, solvency is the ability to meet long-term payments and is related to the management of the financial structure of the company.

“The approaches tend to vary greatly depending on the size of the companies. Large companies tend to know and handle the different alternatives well. However, the Spanish SME has traditionally been financed via equity, retention of profits, and bank debt. This is an ideal moment to reopen the debate on the advisability of diversifying the sources of financing and evaluating the options available in the market based on the specific characteristics of each company. It is time to overcome the fears of opening the shareholding to investors such as private equity, which in addition to financing, provides professionalization and support in management,” reflects Francisco.

On the other hand, our Partner comments on his opinion on the role of M&A in current and future times: “As we know, seeing changes in M&A takes time and is not usually the best option when immediate problems have to be solved.” However, he indicates, “not making all these reflections on time can lead companies to situations in which the only option is to turn to opportunistic investors. With this comment I do not want to discredit the work of the funds with a distress profile, they are a good option when we are facing a special or very deteriorated situation, but avoiding reaching that point and trying to maneuver in time is a shared responsibility of the entire management team.”

At ONEtoONE Corporate Finance we have created a podcast solving the most common doubts about our company valuation service.

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