A Perspective from Our Founder: This Too Shall Pass – M&A in a Post-Viral World

We see light at the end of this tunnel.  Like many others, our firm has experienced firsthand the personal side of this crisis, and we are so grateful for the heroes in medicine!

On the business front, we have all witnessed the resiliency of this economy which has weathered down times before – from our prior lives on Wall Street, we have worked through the similarly dark periods of 1987, 2000 and 2008. These market dislocations were born in and fueled by uncertainty.  As renowned investment strategist Jim Paulsen said in a recent interview, “Give me bad news any day over complete uncertainty.”

This current downturn is likely to get worse – Goldman Sachs is now expecting 2Q GDP to decline 24%1 – but then better. This aggressive downturn is driven by a public health issue that we are all hoping can be contained as the healthcare professionals and politicians try to “bend the contagion curve” in the short term.  Notably, with social distancing, summer weather and perhaps new therapies, Goldman sees 3Q potentially rebounding to 12% growth.  In addition, the Federal Reserve’s aggressive actions and government stimulus should provide much needed liquidity relief.

Nevertheless, the uncertainty persists – so our team has formulated a view on how to cope, and we are launching a series of calls with subject matter leaders to better understand key areas, including government programs, legislation and practices we see working amongst our clients.

With this note, we call out what we are seeing and hearing from our clients, prospects and middle market ecosystem: 

• Stay Calm – The stock market is the harbinger of expectations, and we are all looking to see signs of stabilization in the public markets.  However, during massive dislocations, we’ve found its harder to read direct messages, especially with an incessant stream of headlines roiling the market.  Our mantra has always been: In the midst of the moment things can seem the worst – however, we firmly believe that this too will pass.
• Cash Positions – Clearly, there are sectors taking the full brunt of the crisis.  The Wall Street Journal is reporting domestic passenger flights could shut down entirely.  However, with the 11-year bull run raising corporate cash balances and PE dry powder to record levels, we are about as fortified as possible.  Moreover, the Fed chatter is suggesting that even the Trillion-dollar stimulus may need increasing.
• New Normal – With every challenge there must be a silver lining (it’s the American way!). There are broader, more permanent trends and disruptions that will supersede pandemic-related triage.  This event is likely to spark a re-shaping of how work gets done, and we expect technology to play a critical role.New abbreviations for reality – For example, imagine how the major consulting firms may be seeking ways to transform their business models to new spatial forms.  We expect “reality” will begin to take new forms:
  • Virtual: VR – computer simulated;
  • Augmented: AR – live world with computer enhancement;
  • Extended: XR – a new term for a combination of live, simulated and enhanced forms.
• M&A Implications: On the other side of today’s uncertainties, we consider the question: What would it take to reinvigorate M&A activity?  Let’s begin with the Seller’s point of view.  A rational approach considers a cascade of “Ifs:”
  • If they were on the fence about selling …
  • If this downturn lasts longer than expected, and they have to continue to self-fund …
  • If they perceive that valuations have peaked and could potentially roll over, etc.

All of this may add up to a more open mind toward taking the inbound call from the buy-side or choosing to launch a sell-side process – but not a fire sale as these uncertain conditions are external and broad based and not structural.

From the Buyer’s point of view, our market checks suggest that some companies and private equity groups are looking forward.  Many investors have ample capital to deploy and are considering opportunities with a long-term hold period in mind – these investors are sophisticated and are more focused on the quality and availability of great assets than general market conditions.  We have seen our buy-side clients leaning on the Harbor View team more heavily to continue curating the acquisition pipeline while our client leadership looks to triage their personnel, customers and operations.

While this Coronavirus (COVID-19) threat has hit hard, the disease itself appears to be getting better understood, and there are now country-wide examples of flattening contamination curves. So, what is next? On the other side of this challenge, how will your business be positioned to take advantage of the inevitable changes, such as mobility, virtual work and more efficient healthcare delivery?

We wish everyone well.

1 Goldman Sachs Investment Strategy Group – Sunday Night Insight – March 22, 2020.

2 Medium – “What really is the difference between AR / MR / VR / XR ?”