Amid the coronavirus pandemic and resulting economic fallout, it's fair to assume that we’ll see slowing merger and acquisition activity. Companies will need to assess new regulations, tax incentives, revenue shifts, and market realities before moving ahead with any M&A engagements.
The M&A question marks extend into the office equipment dealer and managed print services (MPS) markets. For thoughts on the situation, ChannelE2E reached out to Zygoquest -- a top M&A advisor in that sector.
Zygoquest is helmed by Michael Dudek and Rich Wisniewski. The pair have influenced more than 500 M&A transactions. Many of their recent deals have involved office equipment companies, managed print services specialists, and other technology services companies.
In an email interview, ChannelE2E gathered Dudek's thoughts on the pandemic and its impact on M&A activity.
ChannelE2E: Have you noticed any impact on general M&A activity from the pandemic?
Dudek: Yes, we have noticed an impact. In general, buyers have slowed down deal activity and transactions under signed letter-of-intents (LOI). The exclusivity provisions in the current LOIs are being extended and no transactions have been cancelled.
ChannelE2E: Is it having any effect on deals that are currently in the midst of being worked out?
Dudek: Yes, buyers have slowed down for two fundamental reasons. First, most buyers (no different than the sellers in this regard) are presently occupied with their own operational issues caused by the coronavirus pandemic.
Second, as economic conditions clear up some, we expect buyers will want to assess the impact on financial performance and operational issues caused by the Coronavirus pandemic - both the short-term impact and any longer-term impact. Buyers are not only assessing businesses they intend to acquire; they also are assessing their existing operations. The short-term financial impact will be relatively easy to assess from reported results. The longer-term impact will be more challenging to forecast for certain types of businesses, especially in industries where the business model might drastically change.
ChannelE2E: Do you think we’re seeing the impact of the pandemic now? Or is it something that we’ll feel further down the road?
Dudek: We are seeing the impact on transactions now and expect the impact to continue for the foreseeable future till things sort out. It is important to distinguish the impact from the pandemic from industry to industry which is very different. We manage many M&A transactions primarily in two different industries – the office equipment industry and the IT Managed Services industry – two industries of course which have been rapidly converging.
In the office equipment industry, where dealers sell equipment as well as the related services and supplies (usually about a 50/50 mix), these businesses are being hit relatively hard from the pandemic because clients and their employees are absent from the normal workplaces which has caused the purchase cycle of new equipment to slow down, and the use of existing equipment to decline during the absence. Conversely, owners of IT Managed Services Providers (MSPs) have been telling us that Managed Services recurring revenue has been relatively stable while on-site project work has slowed because of social distancing and working-from-home scenarios. In fact, IT-MSP owners are experiencing top and bottom-line growth opportunities as clients and their employees are requiring work from home IT capabilities and services.
ChannelE2E: What potential roadblocks could M&A activity face once the pandemic eases or ends?
Dudek: The overall economic climate right now, although it has been caused by very different circumstances, seems somewhat analogous to what transpired in 2008 when the market crashed.
Buyers in 2008 slowed and postponed M&A activity; however, they accumulated large amounts of idle cash while waiting on the sidelines. Potential sellers during that time, procrastinated in putting their businesses on the market for sale because as short term financial results declined, sellers feared buyers would not pay fair value for their businesses.
Like now, when that 2008 crash occurred, it seemed there was no predictable end in sight for the turmoil which was occurring. But sure enough, in a relatively short time later, M&A deal activity increased dramatically as financial results rebounded and buyers wanted to invest idle cash.
The fact that current interest rates are extremely low creates additional opportunity for buyers to effectively leverage acquisition investments. Like always, the strongest businesses will survive. Businesses which are not as strong will seek an exit strategy. For some industries, the dramatic changes in operational business models will change which will lead to additional M&A activity. Hopefully, people will stay healthy and conditions will improve as soon as possible, then the economy will rebound, and M&A activity will heat up dramatically.
Side note: Special thanks to Dudek for sharing his insights during these extremely busy times. One of ChannelE2E's deeply valued sources, Dudek and the Zygoquest team regularly share news and perspectives with us -- without ever requesting anything in return. -- Joe Panettieri, Content Czar, ChannelE2E