Three of Cleveland’s top dealmakers assess the economic impact of the coronavirus pandemic and the opportunities that might arise on the other side – whenever that happens.
Business owners, investors and dealmakers are struggling to assess the damage the coronavirus pandemic is doing to the global economy. “(As March began), we were at record stock market levels, record cash levels on balance sheets, record levels of capital on private equity coffers, and ultimately, valuations, as a result, were very good — near record levels,” says David Dunstan, managing director at Citizens Capital Markets.
“We were priced to perfection in the stock market. Unemployment was at all-time lows. It was an ideal environment for growth and M&A and opportunity.”
Before March closed, the stock market had lost all of the value it had gained since 2016, millions of employees were laid off and the economy was forced into an unprecedented shutdown. With the number of new COVID-19 cases appearing to level off, and the market bouncing back, there has been talk of reopening the economy. But any semblance of a return to normalcy appears to be months, if not years, away.
“The message is pretty simple right now, which is you need to make it through to the other side,” says Stewart Kohl, co-CEO at The Riverside Co. “We need to work together to get to the other side of this. Then we can worry about the long term and the future.”
Jayne Juvan, partner and chair of the Mergers & Acquisitions and Securities & Capital Markets practice groups at Tucker Ellis, tries to find reasons for optimism and hope in dark situations.
“I think it’s going to get harder for us, unfortunately, before it gets better,” Juvan says. “But I think that there’s going to be a lot of learning and a lot of opportunity that come out of this for the people who are really focused and paying attention. And you’re going to see that some companies are made in this moment.”
Dunstan, Kohl and Juvan spoke with Smart Business for a roundtable discussion about the pandemic’s impact on the economy, what they’re hearing from their connections in the market and what, if any, positives can come out of these difficult times.
What are you hearing from people you talk to in the market about the impact of the pandemic at the individual and/or company level?
Juvan: We pivoted from talking about growth opportunities, strategic initiatives and alliances and M&A to, how do I survive what is coming at us so rapidly? I would say that is where we still are. We’re also on top of trying to help our clients navigate the massive stimulus package that has been passed by Congress. So overnight, essentially, things changed dramatically.
Kohl: The virus is consuming all the oxygen. It is all-consuming for families, our places of worship, our recreational places and our workplaces. Specific to M&A, there is some activity out there. There are deals that had progressed very far, including some that we closed that could get to the finish line. There were some deals that were in process where, for a variety of reasons, the sellers and their advisers chose to continue the discussions. Then there are many deals under letter of intent.
But I would say 90 percent of any new deals have been put on hold, partially because we’re all consumed with the virus, partially because there are some structural issues around diligence, partially because there’s a feeling among buyers and sellers and their advisers that water may be finding a new level in terms of valuations. And right now, the water level would be splashing up and down too much to really figure out what the right level is. The short answer is, I’m not hearing a lot about deals, but there is still some life out there.
Dunstan: With the (2008) recession, there was a little bit more of an ease into it and a little bit of more of an opportunity to manage some of those market dynamics. This hit, and maybe shame on all of us, I suppose, at some level, but there was never an expectation. Nobody was planning for this type of dramatic, abrupt halt to normal operations. And so that type of uncertainty is very bad for the M&A market. Once this hit, all parties — companies, mezzanine lenders, private equity groups, corporate banks, the nonregulated institutions — they all started focusing on their portfolio and servicing their customers, and rightfully so. So the opportunity to fund new deals has shrunk dramatically right now.
What industries are
you seeing that are still showing signs of life?
Juvan: Even when you’re in crisis times, there still are companies that are performing. There still are a lot of opportunities. The Walmarts and the retailers that have to stay open are seeing increasing demand — the Targets, the grocery stores, home delivery services, the Amazons — definitely see a lot of strength there.
Another industry that I’m really focused on, for obvious reasons, is the health care industry. And I think what we’re going to see is possibly more innovation in health care than we’ve ever seen before. What this has done is completely tested health care systems worldwide. We’ve seen how it has underperformed and performed below our expectations in countries that you wouldn’t expect, including the United States.
In Ohio, for example, we’ve already seen innovation with personal protective equipment. You have companies stepping up and saying, ‘Manufacturing is one solution, but sanitizing PPE is another. So we’re going to take this product to market, and we’re going to do it really quickly and work in conjunction with our governor, the FDA and the president himself to get this fast tracked through the FDA so that we can get this out and use it not only in Ohio, but in other states that are really struggling as well.’
I think that you’re going to see a lot of public-private partnerships coming together creating innovation that is going to unlock a lot of value and a lot of opportunity going forward.
In terms of dealmaking activity, what challenges do companies face in trying to get transactions done in the current climate?
Dunstan: The hard part in this environment is the inability to get in front of people from a person-to-person standpoint. The travel restrictions, of course, all are for good reason. The reality is, in an M&A context, a lot of that interpersonal interaction takes place during this management presentation phase, and today, we have companies where we’re having conversations about managing at least the initial dialogue via video conference. And so much of this process is culture and fit and requires, to some extent, interpersonal interaction. That’s going to be a really difficult dynamic to manage in this environment. Most of the diligence can be done remotely, and most of it is typically done remotely. However, that interpersonal interaction is absolutely critical.
The other piece is that almost every deal, almost every M&A transaction has a snag somewhere in the diligence process, where the negotiations get much more difficult around an issue that might not have been foreseen at the outset but develops during the course of the process. And that’s often when as a group you say, ‘Look, we’re at a point where we need to sit down in person and just work this out. We need to get together in New York, Cleveland, or Chcago, or somewhere in a convenient location and just sit down and work out that issue.
Those are the interactions in this environment that are going to be hard to replicate in a video conference. Until people are comfortable and the social distancing issues start to relax — and eventually they will — but until that time, you’re going to have to develop trust, relationships and appreciation for culture remotely, and that’s tough.
What lessons, if any, can be taken from the 2008 recession and applied to economic recovery from the current downturn?
Kohl: The reality is this is very different. The 2008 downturn was, first and foremost, a financial crisis that then led to a recession. The scale of this downturn, the number of businesses, the global nature of it, the way it affects every industry is — it’s an overused word — but it is unprecedented.
I don’t think prior to this we could have gotten the Republicans and Democrats to agree that the sun was going to come up tomorrow as quickly as we got a $2 trillion stimulus program. And that’s not the end of it. The Federal Reserve balance sheet has now purchased $6 trillion. These are stunning numbers. And they are the direct lessons of 2009, when it started with a financial crisis and ultimately governments and central banks realized that the only way to solve the crisis was to inject enough liquidity, enough income and enough certainty that markets would begin to function normally again, to step back up.
But while there were numerous companies that went bankrupt after 2008 and 2009, there weren’t a lot of companies that went from 100 to zero overnight, that literally stopped having revenue and stopped having employees. This is just not something we’ve seen before. So I’m reticent to draw direct conclusions. I’m hopeful that because economies around the world were pretty healthy going into it and because we now see that there’s some evidence that China appears to be coming out of it pretty fast, then maybe it will be more like a V. But I think it’s much too soon to conclude that.