Engines that will drive the buy and sale of companies By ENRIQUE QUEMADA, Chairman of ONEtoONE Corporate Finance
Although we are in a period of turbulence and paralysis caused by the Covid-19 crisis, the M&A world will be revived in a few months and will do so vigorously.
Below, I describe the ten engines that will drive the buy and sale of companies from September this year:
1. Ten thousand private equities funds have raised capital and have seven billion euros under management. Private capital fundraising posted a banner year in 2019, with $888 billion raised, being the most private capital ever raised on an annual basis. They have an urgency to invest that money; if not, they will not be able to raise new funds in the future. The crisis generated by the coronavirus will not stop the buying and selling of companies.
2. More than a third of business owners in the developed world will be trying to sell their business as this becomes the correct choice for such profile of entrepreneurs.
“Ten thousand private equities funds have raised capital and have seven billion euros under management
3. This unexpected crisis has made many business owners realize that maybe it is a wise choice to sell their business. When this passes, their company will be of great attractiveness to potential buyers.
4. The fat injections of liquidity by central banks will give economies a further boost.
5. Healthy companies will capture this liquidity and use it to make acquisitions.
6. In this crisis of the COVID-19, we are seeing more partners who changed their minds in favor of selling their business.
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7. Companies are reviewing their internal organization, will divest of non-core units, and bring production closer to home by acquiring local competitors.
8. Telemedicine services, online education, e-commerce, and virtual communication will be preferred targets for acquisitions, given their need during the current situation.
9. Buying opportunities will arise in distress in energy, leisure, retail, and other sectors, mainly affected by the crisis.
10. Since the coronavirus crisis is temporary, and it affects all industries, investment bankers will normalize the company results in valuations, isolating the effect of the temporary disruption, which will facilitate transactions at reasonable prices.
Companies will have made cost adjustments and optimized their capacities, learning to work more flexibly and efficiently, which will increase their attractiveness.
Many companies are in a mid-size, lacking the economies of scale of large businesses, nor the flexibility of the small ones.
We are experiencing a wave of accelerated concentration in most industries. The first M&A transactions in the sector or sub-sector are usually made at higher multiples. Prices fall as concentration proceeds, as also do profits of those left out of the process. Also, because the appetite for buying is already satiated, there are already fewer buyers, as the size is no longer a necessity for them.
With so much money in private equity, there will be a unique opportunity for those business owners who want to incorporate a partner and lead an industry consolidation.
“Companies will have made cost adjustments and optimized their capacities, learning to work more flexibly and efficiently, which will increase their attractiveness.
Chairman of ONEtoONE Corporate Finance Group. Author of international books on Corporate Finance and Strategy. International speaker and professor of Investment Banking at IE Business School. Enrique is also Vice-president of the Spanish Association of Mediators, member of the Advisory Council of Expansión y Actualidad Económica, member of the Board in Madrid of Young Presidents Organizations and of the Board of the Association for Corporate Growth, among others.