VALUE PRESERVATION AND TRANSACTION TOOLS IN CRITICAL TIMES

Michael Gaul, Head of Germany and Managing Director at Acquinex; Dr. Sven Oleownik, Partner and Head of Germany at GIMV Germany; Markus Schiller, Head of DACH and CEE at Datasite Germany GmbH; Fabian Wasmus, Partner at Vitruvian; and panel head Tobias Blaser, Partner at PwC Deutschland, discussed value preservation and transaction tools in critical times.

First, the panel focused on portfolio management. It emerged from the discussion that, on the one hand, investors are more cautious due to the COVID-19- related uncertainty in the market; on the other hand, they keep an eye out for new investment opportunities arising from the crisis. It became clear that many actors are facing the prevailing uncertainty in the market by strengthening their market position, incorporating add-on business models and focusing their core business and its needs on private equity (PE) funds, as there is a lot of money in this market, especially for investments in big corporations that were highly affected by the crisis. Regarding transactions, the panel expected larger transactions by PE funds in the future, while smaller and medium-sized transactions were currently still the norm. Besides content adjustments, portfolio management also became virtual. Some panelists already experienced and completed their first virtual exit and were very pleased.

The sectors that most investors focus on are healthcare and technology. Automotive, industrial and consumer goods-related companies are in a more complicated situation; however, some companies managed to profit from the shift to online commerce.

This led to the next topic: the challenge of understanding the target company and determining its value during COVID-19. Nowadays, the key question to be answered before a transaction or before investing in a company is whether the target is weakening due to the economic crisis caused by the pandemic, or whether there are unrelated structural problems that are now becoming apparent due to the crisis. The same problem also occurs the other way around when trying to understand how companies managed to profit from COVID-19. In this situation, it is crucial to determine if that uplift will last, if it was a one-time opportunity and how that will affect the purchase price.

In general, however, the panel agreed that COVID-19 would not have a long-term impact on pricing. Reasons for that are that the PE industry is willing to pay high prices and are trying to normalize the situation and many companies are investing in their stability, sustainability and performance. Some industries, for instance, experienced a digital transformation, and appear now more sustainable than before the crisis.
When asked about a forecast, the panelists seemed positive. There is strong evidence of market recovery: Especially productive assets, and therefore private equity, will become more attractive; a lack of money is not to be feared. In terms of transactions, the panel expected a wave of deals that were postponed due to COVID-19. However, the panel warned that the economic crisis caused by COVID-19 and its long-term effects on the M&A market were not to be underestimated.

In terms of transaction tools, the panelists highlighted two factors in particular, namely warranty and indemnity (W&I) insurance and technology tools.

The panel agreed that people were willing to accept and adapt to technology tools, (for instance, Zoom, data analyzing programs and drones for the visit of production sites). While many tools have improved or were newly invented, the majority of them existed before but were not frequently used. The COVID-19 pandemic forced a change. The panelists agreed that, although there are some occasions where a face-to-face meeting is necessary, the quality and usability of these applications is enormously good and made home office and virtual business meetings possible in the first place and, therefore, protected entire industries from being completely shut down.

During the crisis W&I insurance played an important role, as they met the desire for more stability in the market. By decoupling guarantees from purchase agreements through insurance, risks are being limited. More “synthetic” coverage is demanded in particular in corporate deals and at distressed transactions, which goes hand in hand with “synthetic” due diligence programs. Concerning the coverage, many buyers and investors are looking for a low-risk profile and are keen that insurance also covers COVID-19-related issues. Surprisingly, the pricing of insurances remained stable during the crisis, which benefited the sellers and buyers. The panel, however, emphasised that although W&I insurance is an important tool to make M&A transactions run more smoothly, not every risk can be outsourced and avoided.

When asked about post-merger-integration, the panelists agreed that these situations were always critical and became generally more difficult, especially in terms of international partners. In order to bond, face-to-face meetings are important and the new situation made it more complex. However, it is noticeable that both buyers and seller, have a greater sense of purpose in pursuing transactions, focusing less on cultural differences and more on the business merits.

Chaired by
Tobias Blaser,
PwC Deutschland

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