When COVID-19 hit, we saw a temporary shutdown in M&A activities in Denmark. The outbreak increased the uncertainty about the financial performance of companies across directly affected industries and those indirectly exposed to a medium-term retraction in the economy. In order to complete acquisitions, most investors and financing banks need a much higher comfort in financial forecasts than what was possible at the beginning of the shutdown.
After the summer, the M&A market has improved significantly, and both buyers and sellers are more favourably disposed to complete transactions. Management has had time to gain clarity about how the potential COVID-19 scenarios may affect their business and is now ready to engage in an informed dialogue with potential investors. Financing banks and direct lenders are also active again in the market, which is required for private equity deals in particular. Moreover, COVID-19 will not only affect the M&A volume but also its nature.
Focus builds resilience
During the COVID-19 crisis, many Danish companies have been forced to put their businesses under scrutiny and ask themselves: what are we truly good at? Often, focus needs to be on the core business, while non-core assets are increasingly carved out to build a resilient and competitive business. Consequently, we see many companies with increased focus on inorganic growth strategies, including technology acquisitions, portfolio optimisation and cross-sector alliances with specialists.
In Denmark, such inorganic growth strategies have been prevalent across industries for quite some time. We have already helped businesses acquire new competencies and technologies that help them gain and maintain market shares in a rapidly evolving society. I believe we will see an acceleration of these trends, as COVID-19 has been a wake-up call for many businesses in need of transformation – or consolidation.
I believe that when we look back at the COVID-19 pandemic in a few years, it will be considered one of the key catalysts for digital business transformation and re-thinking of business models.
COVID-19 may spur sustainability
In the light of COVID-19, many countries have increased their expansionary fiscal policy with high government spending. This includes investments in large infrastructure projects. With Denmark’s strong position within renewable energy, combined with an increasing public demand for more environmental investments, the current situation will help drive green investments in individual countries or the EU in an effort to kick-start the economy and limit CO2 emissions.
Simultaneously, many startups and emerging companies have developed – and continue to develop – new technologies to increase recycling and to reduce carbon footprints from transport and production. As these technologies continue to mature, I consider it natural that large corporates will seek to acquire sustainable technology through M&A. Within renewable energy, we are already seeing a movement in this direction where pension funds are particularly interested.
I believe that when we look back at the COVID-19 pandemic in a few years, it will be considered one of the key catalysts for digital business transformation and re-thinking of business models.
Direct lenders fill the financing gap
During the financial crisis in 2008-2009, all funding disappeared, and M&A activity plummeted for 18-24 months. Luckily, this is not the case today. There is still capital out there. However, banks and direct lenders are naturally more reluctant to grant acquisition financing in the midst of COVID-19 due to higher uncertainty. To accommodate this, we have included a separate downside protection track to our sales processes, where we provide thorough insights into the COVID-19 scenarios for the specific company and give financing providers time with management to allow them to express potential concerns. We also see that companies are increasingly turning to subordinated loans from direct lenders who are less risk-averse. Although the costs are higher, issuing stocks would be less preferable. Those funds thereby help fill the current funding gap.
As debt advisory will play a vital role in pending M&A activities, l will invite our expert on the matter, Morten Permin, to co-author the next blog post with me.
Forfatter spotlight
Sigurd Ersted Jensen
Sigurd er partner i Deloitte Corporate Finance og er leder af Deloitte danske Financial Advisory-afdeling. Sigurd har mere end 15 års erfaring med corporate finance-rådgivning, herunder bla. køb og salg af virksomheder, børnoteringer, afnoteringer, værdiansættelser og due dilligence.