Over and above our financial calendar and legal responsibilities it’s important not to lose sight of what is happening in the financial markets so we asked Julian Macedo, MD of The Deal Team to give us some insights.
The Deal Team is a company that provides professional transaction execution and management of transformational debt, equity and M&A transactions and creates value by giving management teams back their time.
What impact is COVID-19 having on deals and what trends are appearing?
The strongest activity I have seen is that many companies are taking advantage of equity raises via non-pre-emptive placings to address the immediate impact on company revenues from Covid-19, to reduce net debt and reinforce balance sheets, or to finance the continued delivery of previously stated plans – or often all three. This kind of offering is where companies issue new shares into the market, up to 20% of their existing issued share capital, following guidance from the shareholder body Pre-Emption Group. We haven’t yet seen any rights issues, although we anticipate these may become an increasing feature over the next 18 months.
Also while companies focus on crisis management and cash conservation, very little M&A is happening.
What is the biggest challenge for equity deals at this time and what three tips would you give companies to help overcome these?
First, check your shareholder permissions, determine what they allow you to do, what your likely shareholder reactions will be, and the timetable implications these options imply.
Second, be prepared to explain to the market the company’s new operating environment, and what actions have already been taken to address the funding shortfall across working capital management, available banking facilities and waivers or extensions, coronavirus related government assistance, and existing bond waivers or new bonds.
Third, do the right thing. Investors are currently deciding which companies they wish to support. One way they will be making that judgement was expressed in a recent article by the experienced serial Chairman and CEO Richard Baker. He said: “It’s been said that sports do not build character, they reveal it. The same can be said of companies’ true values during a crisis. For the company’s stated values to be perceived as important internally and externally, as more than words in an annual report, the leaders of the business will have to hold themselves and the business to account”.
Is now a good time to embark on M&A, what are the potential benefits and pitfalls?
Our role is to support internal execution processes for M&A and capital markets. With this perspective in mind, the current environment for M&A is naturally riskier and financing less available than a few weeks ago. Although assets that historically looked expensive could look cheaper today, for an acquirer with the resources to take advantage.
A company looking to buy newly cheap assets should be prepared to look very closely at the target’s new operating environment and medium-term outlook, not least as “cheap” is relative and your own valuation may have fallen. Nevertheless, it may be interesting to take advantage of any short term operating or cashflow issues which could make a strategic target even more attractive.