From our databases, as well as from our personal experience on the current dossiers in progress, we notice that several M&A deals are born and close every day. These are deals in which, of course, the investor and the seller find an agreement about the deal’s provisions. Reaching an agreement implies that mutual convenience conditions have been found.
In light of this, we need to elaborate on some methodological considerations regarding company valuations during the COVID-19’s era: at this moment, there are completely stationary industries, while other ones are working with low efficiency and continuity and/or in prohibitive conditions. It is now clear that the valuations of the ongoing M&A operations cannot be based on the current results; if this were the case, the valuations would be highly affected for the seller, and no agreement would be found. The compromise can be found through a neutralization ("adjustment") of the current extraordinary situation. In normal conditions extraordinary costs and revenues are not considered in a company valuation: the same principle must therefore be applied, mutatis mutandis, also to business valuations in days of COVID-19. Thus, the focus could also be on the 2021 forecasts.
The first reports on the 2020 M&A trend seem to confirm our considerations. The Italian business newspaper “Il Sole 24 Ore” dated 21st April 2020 quotes a KPMG search that compares the transactions of the first quarter 2020 to the same period of 2019 in Italy: this year 231 deals were recorded for a value of € 9.2 billion (in 2019, 213 deals for a value of € 6.6 billion): the first quarter improved significantly both in terms of the number of transactions and in terms of value. In March, there was a slowdown mainly caused by the freezing and postponement of many deals due to the COVID-19 outbreak and the logistical and work complications that have arisen for all of us. However, these deals are likely to be closed later in the year without affecting the annual operations budget for 2020.
Nevertheless, as highlighted by another recent report edit by Dealsuite for the UK, we also need to take into account the following considerations:
- some industries could even be facilitated by the outbreak, with positive outcomes also in terms of M&A, for instance: Healthcare, Food/Beverage and IT;
- the usual valuation divergence between seller’s and investor’s expectetions, which is usually high, could settle on more realistic values, facilitating a quicker achievement of a deal;
- in some industries, the physiological processes of consolidation could be stimulated or speeded up by the current context.
Please don’t hesitate to call us for further considerations and comments on the subject.
Riccardo Bàrbera
