As Ohio seeks to reopen its economy in the coming weeks, a significant number of businesses will face a daunting challenge to simply reopen their doors to customers, says Brian M. O’Neill, a partner at Tucker Ellis.
“Many are not going to survive,” O’Neill says. “Many are going to have to be recapitalized or sold. But make no mistake, there are also going to be some winners out of this for the companies that do this effectively.”
COVID-19 has forced millions into unemployment and left the global economy shaken and uncertain. O’Neill, who has vast experience in the M&A space, says the story on how dealmaking will emerge from the pandemic is yet to be written.
“There’s no doubt in my mind that valuations have been adversely impacted and will continue to be,” O’Neill says. “Most of it, in my opinion, deals with uncertainty about how these impacts are going to continue going forward.”
O’Neill spoke with the Smart Business Dealmakers podcast about his reaction to the pandemic and what he’s hearing from clients in the market. Here are excerpts from that conversation.
Listen to the Podcast
How has the inability to conduct traditional due diligence impacted dealmaking activity?
It’s going to be, I believe, one of the factors that that delays getting M&A activity up to desired levels. We have talked with many buyers recently that have not only struggled with some of the financial impacts, but their inability to do on-site due diligence has really impacted their views on company cultures, on fit and more of the intangible aspects of a deal.
I found that quite intriguing and interesting, as I’ve heard this directly from buyers. I think that’s going to be a dynamic shift in dealmaking that’s going to be slow to evolve as workplaces come back to normal.
Clearly, underwriting has been challenged through this process and will continue to be as we deal with these uncertainties. One other factor — and I’ve only heard a little bit about this — but there are some concerns that the use of rep and warranty insurance, which has been so popular and prevalent over the past couple of years, may become limited for certain types of industries. We’re going to have to see how that plays out, but I certainly think having the RWI product available will be a help to get the market going again.
What are some pertinent dealmaking and/or capital issues that may arise post-pandemic?
Companies shouldn’t count on banks to step in and fund any type of gaps or deficiencies in their capital structures. That’s going to force many companies to pursue equity infusions, either from owners or outside investors. We’re going to see banks more regularly asking for personal guarantees until things stabilize. So again, unlike the past couple of years, the bank shouldn’t be your primary backstop.
For companies that are out there looking to raise capital, I think there’s going to have to be some aggressive strategies to position for that raise because the capital markets are going to take some time to reposition. I believe we’re going to see more focus on ownership and management succession. So, for example, in this current climate, there are tremendous opportunities for the transfer of wealth from one generation to the next through creative trusts and planning techniques in a tax-efficient manner. Similar to 2008 and 2009 when valuations dropped, it’s going to create these opportunities.