June 8, 2020
"In the Middle of Difficulty Lies Opportunity" -Albert Einstein
History has shown that crises present unique opportunities to grow shareholder value through selected acquisitions. Now may be the perfect time to go shopping.
Well-Managed Companies Now Have Their Houses in Order
From an operational point of view, most of our clients have pivoted over the past few months by focusing on adaptation and retooling. Management teams have made many hard decisions on the fly, including:
- Working remotely where possible
- Reducing their work forces when necessary
- Keeping the accelerator down on new business development
- Maintaining sufficient liquidity (including accessing PPP funds)
- Re-examining supply chains
In hindsight, perhaps some of these initiatives might have been addressed prior to the pandemic, but the crisis certainly accelerated their implementation. We are convinced that proactive companies will emerge as more efficient and leaner enterprises and will be better positioned for growth.
Revisit the Strategic Plan
Recently, most management teams have had their heads down so much that they have not taken the time to think strategically. We make the case that this is a unique time not only to dust off the "strategic plan" but to think about filling the gaps in the business. Often organic growth and incremental change is not sufficiently transformative, particularly in certain mature industries, and today might just be an ideal time to look outward.
Reasons to "Buy vs Build"
The right acquisition can help accelerate achieving long-term objectives. Here are some strategic reasons to consider an acquisition:
- Consolidate the market / gain share
- Rationalize supply chains
- Expand product lines
- Acquire complementary technologies
- Broaden sales channels and customer reach
- Increase capacity / establish redundant facilities
- Expand geographically
Timing is Everything
Historically private equity funds launched during or just after crises, investing during periods of disruption, have enjoyed better returns than those investing during "good times". US funds raised during 2008 and 2009 saw median returns almost 30% higher than funds started between 2003 and 2007. We have been in constant contact with many mid-market private equity investors and they are anxious to put their capital to work in the hopes of out-sized returns. If these professional investors are taking advantage of current opportunities, perhaps business owners should follow their lead.
A Buyer's Market
Well-capitalized public corporations and private equity-backed companies are already seizing the moment and filling strategic gaps through M&A. We have observed that the recent market turmoil has begun to shift the M&A world from a seller's market to a buyer's market. Family-held and founder-led companies with clear vision and strong balance sheets should also consider this period a unique opportunity to go shopping.
Capital will be Available
We acknowledge that aside from government supported credit programs and "distressed debt", the credit markets have been in flux. Having said that, the Federal Reserve has flooded banks with liquidity and lenders will shortly be "open for business" again. Further there is an abundance of debt from alternative, non-bank lenders. Finally, risk-based capital such as mezzanine and private equity are becoming proactive in seeking investments. If the acquisition is well-founded, with demonstrable ability to grow sales and shareholder value, supportive capital will be there in the months ahead.
A Cautionary Tale
Many opportunities that are becoming available are distressed and/or cash starved. Accordingly, buyers may be pressured to move quickly, enticing them to purchase at significant discounts. Buyers are advised not to take shortcuts with due diligence and ensure that they are protected through effective structures and legal protections. Remember too, that while synergies on paper may seem compelling, M&A transactions that fail are usually the result of poor integration. Without proper vetting and disciplined execution, a seemingly perfect transaction can turn into a strategic nightmare.
We are here to help
If we can help you in any way, please do not hesitate to reach out of any one on our team.
About Carter Morse & Goodrich
Located in Southport, Connecticut, Carter Morse & Goodrich is a boutique M&A advisory firm that represents founder-led and family-held businesses valued between $20 million and $200 million. For more than 30 years, the combination of our hands-on approach, senior banker attention, strategic guidance, seamless transaction execution and extensive network of domestic and international resources has enabled us to become a trusted advisor to hundreds of business owners.
CMG's Broker/Dealer affiliate, Carter Capital Corporation, is a FINRA member firm registered with the SEC and SIPC.