What was the impact of the global pandemic on M&A and valuations? And what will the lasting effects for companies and investors tomorrow? Tomas Ziegler (Partner at Moore Intaria and Chair of the board of finance of Moore Deutschland AG) and Cuan Grunow (Corporate Finance Manager at Moore Intaria, specialized in M&A Lead Advisory services) share their insights.
Initially, COVID-19 left many companies – not to say, all countries – flabbergasted. Both businesses and countries reacted in all kinds of ways, to the best of their ability. Nobody had ever tackled a situation like this before. The general outlook didn’t help any company in the beginning. Since all was uncertain and because uncertainty equals a higher risk, valuations and purchase prices would turn out to be lower. Not as a reflection of the actual value of an enterprise, but just based on the general risk of the economic environment. In short, COVID-19 put more than a few sticks in the wheels in terms of valuations and M&A deals. “The uncertainty was too substantial for anyone to take a risk at that point. There was definitely a tendency to hold back on everything, so we saw a very big reluctance in M&A deals.”
After a few months, the contours of a different playing field were emerging. Businesses began to see that they could get more control over the situation. Step by step confidence returned to the market. It was certainly very industry specific: some getting stronger, some getting weaker. “We had clients which were absolutely on the winners’ end: they doubled their revenues and had double digit growth rates. On the other hand we had clients that suffered badly.”
From the investment side, the response was also mixed. “On the one hand, we saw PE firms coming in and wanting to try and get cheaper prices for struggling companies – they had some bargaining power there. But at the same time, a lot of investors were trying to get rid of investments that weren’t looking too good.”
From a valuation point of view, the complexity was no less. “It became difficult to analyze and understand business plans or to predict the evolutions in a sector in the next couple of months – let alone the next couple of years. So in every company all the original business plans went out of the window. We had to start from scratch and try to figure out what was really going on. That was one of the biggest challenges in doing valuations.”
“We had one client where business took off like crazy in the first months. Which was nice of course, but one swallow does not make a spring. It was up to us to figure out if this was thanks to COVID-19, or despite of COVID. For start-ups it was even more difficult to separate what was Covid related from what was a regular business operations effect.”
Government support also clouded a clear view in a certain way. How did they impact operations? What will happen when they will be hooked off the life line? “Again, the crux is to separate two groups of companies. There are the ones that never had to use governmental aid: quite a lot of them got a boost from COVID-19that is really impressive. And then there are the ones that needed the aid – and in more than a few cases were struggling anyway. It is interesting to note that they are related to industries – or part of industries – that had structural issues even before COVID-19. Take the automotive industry for instance. A specific part of the industry that is closely related to combustion technology, were already struggling before the pandemic. They had to make use of these governmental programs – but it will be even tougher for them once COVID-19 is ‘over’, because the whole market trends change. Their suffering will last.”
However, from an overall economic perspective, business is picking up again and new opportunities arise. “The German economy recovered fully of COVID-19 in the third quarter of 2021. The predicted growth rate is around 4% this year, and even 5% next year. The pace of this strong growth of the German economy will be set especially by industry related companies. We are pretty sure we will soon see an increase in their M&A activities. By the way, there is really a lot of money in the market, waiting for the right opportunity. When we talk with CFO’s and analyze the market, we pick up positive signs.”
“The general sentiment in Germany is that we are back to normal. Of course, this will differ from country to country, but Germany is lucky not to rely too much on tourism or not to suffer too much from the effects of social distancing. Confidence is back and a potential fourth wave of COVID-19 is less of a concern.”
Things being as they are, what strategy companies should follow now to grow enterprise value? “Again it depends on the business they are in, the operations they follow. Obviously, in the automotive industry, the shift from combustion to battery is defining the future of the German car scene. Many of the OEM and the Tier 1 suppliers address the technological and environmental challenges and are now looking for the best paths to grow.”
“Companies need to gear up to the contactless online presence. Germany was rather slow to embrace the digital market, but now using a digital platform has quickly become a no-brainer for entrepreneurs. The online market is getting a lot of traction.”
“In terms of employment, if you want to grow enterprise value, you want more flexibility from your employees. It’s a really big challenge to manage the expectations of your employees. Never coming to the office doesn’t work, but we have all seen the upsides of working together remotely. Flexible co-working is a good thing we have learned, since it entails more freedom.”
What will remain as before, are the expectations of M&A clients. “We have – as we have always done, for that matter – tightened up our processes. But to our clients, how we reach the best possible outcome, is not that important. What really counts to them is the outcome.”
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