Note on Coronavirus and M&A in the Knowledge Economy - from Equiteq CEO, David Jorgenson
The rapidly unfolding events related to the spread of COVID-19 are creating significant uncertainty and anxiety among companies in the knowledge economy, and we wanted to provide our current thinking about coronavirus from a business and M&A market perspective. I won’t cover the human impact of the disease in this note, but it is very real - our primary concern is the health and well-being of our employees and their families, our clients, our broader business network and beyond. In our capacity as global advisor to owners of high growth knowledge-driven businesses we have a responsibility to examine the current situation and the potential impact on the M&A market in our sector.
Given the unusually long economic expansion phase post-2008, I have been looking for signs of an impending pullback for some years now, but have never seen evidence of it and have become comfortable that this cycle (as all others) operates by its own rules and doesn’t follow conventional wisdom. And like often happens, it’s the unforeseen events that end up in the driver’s seat. The coronavirus outbreak, whose ultimate impacts are still largely unknown, currently appears to us to be well constructed to test the global M&A markets in the knowledge economy that drive so much of the opportunity for our clients to build and realize value.
All of this is driving two major and acute areas of uncertainty: medical uncertainty about spread, severity and prevention, and economic uncertainty about the length and magnitude of the disruption to the economy. If these two major areas of uncertainty are accelerating together, with the medical uncertainties driving the economic ones, what is the likely trajectory and impact? Fundamentally, it’s clear that coronavirus has already and will continue to have a real impact on human lives, the general economy and the M&A environment. However, I strongly believe that the medical questions will be answered in time and the disease will be decoded and its impact mitigated through prevention and treatment. As the medical questions become clearer and more certain, the economic impact will then be easier to assess and the anxiety and volatility will go down significantly.
As we look more closely into what we are seeing in our daily work in the M&A market, it is clear that we are going to be in a volatile environment for some time while medical answers are formulated and life and work habits are disrupted to slow the spread of the virus. This volatility and disruption will likely slow deal processes to some extent as buyers evaluate the impacts on their own business, and potentially take a more judicious approach to evaluating acquisitions. However, since the fundamentals in our space were very strong prior to this disruption, we expect the overall market to stay active.
It’s important to remember that this disruption is not financially driven, but rather is an external shock to a sector that was solidly in expansion mode. At the current moment, the most common reaction among our client base is to keep on working, get creative about operating under these new rules, and push forward. This spirit, and the underlying strength of the economy prior to coronavirus, tells us that we will indeed return to growth. It is not possible to predict when this will occur, but when it does the well-prepared businesses will be able to accelerate from a position of relative strength. For this reason, our advice to clients who are seeking to find a buyer for their business is to push forward aggressively to prepare to launch a process – pausing now might result in missing a market opportunity in the coming months, when both pressure and opportunities to deploy capital peak, that is – right after the virus does.
Beyond this period of uncertainty and volatility, the fundamentals of the knowledge economy remain very favorable for long term growth – just as they were three months ago before we all learned so much about COVID-19. These fundamental strengths include:
- A sector that is highly supportive of company formation, growth and value creation
- A sector that rewards creative entrepreneurs with global opportunities to rapidly scale their business, strong cash flow characteristics and an active community of both financial and strategic acquirers
- Increasing need for inorganic growth in the broader knowledge economy driving acquirers to be more active, pay premium prices and offer entrepreneurs attractive deal structures
Finally, although it is difficult sometimes to envision during periods of anxiety, disruptions like the one we are currently experiencing are rich in opportunities. This may very well be an excellent time to build for the future and position your business to accelerate as soon as the market returns to forward-looking growth. We remain very active in this market – if you would like to discuss your strategic positioning in this time of uncertainty please do not hesitate to call and speak to one of our experts.
Thank you for your attention,