David Sowerby expects acquisitive companies to find targets at more attractive valuations as a result of the COVID-19 pandemic.
“While M&A may have slowed down in the near term, companies that come out stronger on the other side with more cash and a stronger balance sheet will be able to put that to work,” says Sowerby, managing director and portfolio manager at Ancora. “I think that will ultimately be a catalyst to deal flow.”
Strategic buyers will find much more opportunity coming out of this crisis than they did at the beginning of 2020. But that’s not to diminish the impact of what’s happened to the economy or the market volatility that still exists.
“We know we’ve had a pretty meaningful recovery off the late March lows, but my experience tells me having invested through nine bear markets that we’re certainly not done,” Sowerby says.
Sowerby spoke with the Smart Business Dealmakers podcast about the impact of COVID-19 on the dealmaking market, as well as its effect on wealth management and investment matters. Here are some excerpts from that conversation.
Listen to the podcast
What's the best approach right now when it comes to investment strategy?
Given every bear market has its own unique DNA — and this one is arguably the most unique I have known and probably will ever know — I think you go back to the to the basic keys of blocking and tackling, which is that more communication with your client is better than lack of. Second, how were you positioned for portfolios on Feb. 1, before we had any inclination that this was going to be as significant a sell-off as what we witnessed? I think those are really the two most essential points.
Do you expect this crisis to result in new procedures or guidelines when it comes to doing deals?
You’re always a little anxious when it comes to the potential for too much regulation. Sometimes it’s with the best intentions, but it leads to what people refer to as unintended consequences. So there’s that concern. But let me deviate a little bit and speak about the CARES Act and the desire to want to shore up liquidity for companies and provide cash to meet payrolls to keep people’s livelihood intact. I have concerns when I hear heightened discussions when it comes to the ability of a company to decide in the shareholders’ best interest how to allocate their capital.
First and foremost, with respect to dividends and the ability of a company, if they believe it’s right and in the best interest of the shareholder to pay a dividend, they should be allowed to. I know in the very near term that share repurchases and buybacks are definitely on hold for the majority of companies. I’m enthusiastic in the near term about the fiscal response. But I do worry about some of the unintended consequences when it has the potential to disrupt a company’s own thoughtful capital allocation that has benefits to the shareholder in the long term.