A leading tech dealmaker lays out what CEOs should do now to get ready for when M&A returns after the pandemic

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  • Andrew Daniel is an investment banker at Digital Capital
    Advisors, LLC, a technology-focused global investment bank.
  • Despite the coronavirus’ impact on the economy, mergers and
    acquisitions will resume quickly when the crisis fades, he
  • Companies are affected by the economic downturn differently,
    and founders and CEOs should adapt for future deals.
  • Founders and CEOs should focus on executing, overcommunicating
    with their investors and boards, and identifying potential deal
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In our new COVID-19 world, companies don’t have to give up hope
with regards to mergers and acquisitions or fundraising ambitions.
The global economy is grinding to a halt and businesses of all
sizes are increasingly affected by the new status quo, but M&A
and fundraising are here to stay.

Although it’s been a century since a pandemic has had such a
global impact, the lesson learned from previous crises is that
markets rebound and deal activity resumes once the macro
environment stabilizes.

While total aggregate deal value will likely decrease
significantly in 2020, mainly driven by mega-deals being put on
hold, total deal volume will recover significantly in the second
half of the year.

As strategic buyers and investors get accustomed to the new
normal, and attentions turn away from short-term market reactions
and crisis planning with portfolio companies back to generating
long-term growth, now is the time for action among founders and
CEOs, whether they are heavily negatively affected (revenue falling
by 50% or more), slightly affected (revenue falling less than 25%),
or growing. Each can take steps today to prepare themselves for
future M&A and fundraising.

The key is visibility. In uncertain times like these,
entrepreneurs must build credibility with buyers and investors —
a hard ask in a time where visibility and clarity is limited. Those
that can build familiarity and credibility for their plans during
COVID-19 and afterwards will be best positioned to take advantage
of M&A down the road.

Strategic buyers are taking varying approaches

Like companies, strategic buyers fall into the same categories.
They’re also impacted by their ownership status.

Public ones are mostly focused on share price, with many
declining 30% or more. As such, they’re often hesitant to pursue
deals until the economy stabilizes and they’re back on stable

Private buyers don’t have to worry as much about appeasing
shareholders so they can return to M&A faster, particularly in
a 0% interest rate environment.

For heavily affected buyers, revenue and share price declines,
team safety, and customer retention are top priorities. They’re
planning for worst-case scenarios and ensuring that they have the
cash to survive, and deals have mostly ground to a halt.

Slightly affected buyers are taking different approaches. Some
are focusing internally, minimizing costs. Others, although with
more scrutiny than before, are selectively evaluating opportunities
that are highly additive and attractive.

Finally, buyers that are growing are eager to capitalize on an
unprecedented opportunity with consumers at home and are actively
looking at businesses that are also growing user bases, engagement,
and revenues, even if valuations remain up for debate now.

Private equity has the advantage now

Private equity has experienced a significant change in a
COVID-19 world. Six months ago, entrepreneurs had the advantage,
leading to competitive processes and sharply increased valuations.
Now, businesses are struggling to survive, making them prime
acquisition and investment targets, and the advantage is with
private equity.

Private equity firms are reminded in hindsight of elevated
returns from 2008 and 2009 vintages, with some funds increasingly
willing to run into the fire, trading revenue risk (due to a lack
of visibility) for discounted valuations.

While some private equity funds continue to sit on the
sidelines, deals will surge rapidly.

Venture capital is poised to return fast

Venture capital firms are taking stock of their portfolio
companies and deciding which companies they’ll give additional
capital and which they won’t.

Given the distraction and associated time of managing their
portfolios during the crisis, venture capital firms will wait on
new opportunities until their affairs are in order. For deals that
were underway before COVID-19, some term sheets are being
renegotiated. Expect venture capital dollars to lag in the near
term but return back swiftly when the crisis ends.

How founders and CEOs can prepare for when M&A comes

  • Focus on executing. For those negatively
    affected, extending cash runway, retaining customers, and defending
    market position needs to be top priority. Those that are benefiting
    need to capitalize on the opportunity. You’ll be judged for your
    ability to succeed in a favorable environment.
  • Overcommunicate with your investors and board.
    As the pandemic continues, businesses will increasingly face cash
    challenges, and getting capital from investors may be the last
    resort. Keep them informed so they are not faced with a surprise
    capital need.
  • Identify potential acquirers and investors.
    Deals will happen in 2020. Identify tier-one acquirers or investors
    now and develop specific theses for each one, because once clarity
    towards recovery comes, parties will act swiftly.
  • The more information, the better. Give
    potential acquirers or investors plenty of information and data
    they need in high quality and easy to understand formats to build
    comfort for those that are evaluating it.
  • Be top of mind when certainty returns.
    Building relationships and staying top of mind for investors and
    acquirers has never been more important or more difficult when
    people are working at home. At the end of this crisis, a long line
    of companies will be seeking to be acquired and looking to raise
    capital. Do what you can to get to the top of the stack for when
    that time comes. Now is the time to focus on your top prospects and
    have casual conversations with decision makers, even if just to
    discuss potential deals, to build familiarity and credibility.

Andrew Daniel is an investment banker at Digital Capital
Advisors, LLC, a technology focused global investment bank.
Previously, Andrew founded The Kickoff Group, a consulting and
advisory firm focused on providing strategic advisory to early and
growth-stage technology companies throughout their life cycle. 

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A leading tech dealmaker lays out what CEOs should do now to get ready for when M&A returns after the pandemic