The COVID-19 pandemic is bringing to life doomsday scenarios that even seasoned dealmakers like Jon J. Pinney dismissed as the stuff of Hollywood.
“You just never think you could have a situation like this,” says Pinney, managing director at Kohrman Jackson & Krantz. “I’ve read about it, seen it in the movies and thought about the possibility of a pandemic. But when you were in the middle of a deal, it wasn’t on the top of your list.”
It is now, Pinney says. And as business owners, investors and dealmakers pick up the pieces from this economic upheaval, they will take a closer look at the potential for macro- and global-level business disruptions.
“One of the things that we’re going to do is take a much harder look at insurance policies and also terms and conditions,” Pinney says.
Pinney spoke with the Smart Business Dealmakers podcast about KJK’s reaction to the pandemic and what he’s hearing from clients in the market. Here are excerpts from that conversation.
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How has this crisis impacted deal activity?
Pretty much every deal that we were working on, both parties pumped the brakes. Many of the deals require access to the capital market and lenders who help make the transactions possible. Many of those banks and capital sources pulled their term sheets. So, yes, it’s certainly had a chilling effect immediately.
Do I think it’ll recover? I do. I think there’s still a ton of capital in the M&A system and particularly through the private equity firms, and I think it’ll come back. New deals will be at certainly lower multiples, or at least there will be a lot more caution, and it will take longer to get deals done.
Things were very frothy over the last 12 months. Multiples were at an almost crazy high level, and there was an insatiable demand for new opportunities and new transactions. I think this is the reset that was inevitable, but it happened way faster than anybody expected.
Do you think we’ll see a shift from a seller’s market to a buyer’s market?
I do. I think something like this is going to reset the economics in these deals. But at the same time, a high-quality business is still going to trade at a very high multiple. I don’t think that’s going to change. It also depends on the sector. Take a look at stock prices.
For instance, Amazon, despite the situation we’re in, I think it just hit an all-time high. Ecommerce, software, technology, cloud services, logistics, transportation, distribution facility businesses — those lines of business are still going to command a very high multiple and favorable deal terms. Anything that falls outside of that, particularly in the energy markets, is absolutely going to see lower multiples and more difficulty closing transactions.
I think there’s no mystery that the oil markets have been hit hard and a lot of the other energy sectors have been hit hard. So with that level of disruption, it will be some time before you see multiples that are close to what we were looking at over the past 12 months.