COVID-19 spreads uncertainty through industrials middle market, though fallout yet to materialize
12 March 2020
COVID-19, or the novel coronavirus spreading throughout the US and abroad, has yet to concretely impact middle market industrials M&A in a negative way, though uncertainty is growing and investors are wary of access to capital eventually diminishing as a result.
“[COVID-19] has come up in one of the deals I’m working on as well as a general deal environment conversation,” said Eric Doesburg, managing director of electronics and manufacturing at Charles Town Holdings, a private equity firm in Charleston, South Carolina. The deal is a potential strategic acquisition.
The impact the virus has had on the supply chain is coming up in due diligence, Doesburg said. The increased scrutiny is not prohibiting progress on deals, though it is intensifying.
There was already a higher level of scrutiny related to supplies from China given tariffs. But the “trifecta” created by COVID-19 and the developing OPEC disputes are “piling on,” Doesburg said. “Just like companies are assessing the impacts of these forces on their core business and starting to take action to mitigate, I expect we will see the same type of dynamic in the M&A deal flow.”
Factories in China are coming back online, Doesburg said of his supply chain network. But the issue of getting product in and out of ports is presenting a new challenge with some companies having to shift to more expensive air shipping in the near term.
Companies and deals with complex supply chains have the greatest risk, Doesburg said, because the response has been different across nations. “My expectation is that companies will act cautiously and conservatively on the investment and M&A front until the pace of uncertainty starts to normalize.”
Anna-Katrina Shedletsky of Instrumental, which captures and analyzes assembly line data for manufacturers including major electronics companies operating in China, said factories the company observes are running at expected capacities.
“We haven’t seen extensive issues beyond initial shutdowns,” she said. “We’ve seen some programs get delayed, but in general we’re seeing lines come up and units run down them.”
The biggest damage she noted so far was done to peoples’ confidence in manufacturers’ brands.
Andrew Munson, a partner at MBS Advisors in Florence, Massachusetts, said deals in his pipeline have remained largely unimpacted and lower interest rates from tariffs have continues to help M&A. There is concern that prolonged market slowdown will affect M&A.
Companies with operations in China have seen some distraction and disruption, Munson said, but for dealmakers like him operating domestically “it’s been business as usual.”
Other middle market M&A advisors responding to questions for this story agreed that there has yet to be an impact on domestic M&A.
“We have not yet seen any impact from the coronavirus issue,” said Ben Knight, managing partner at Viking Mergers & Acquisitions in Mount Pleasant, South Carolina.
Another banker working in industrials, extensively overseas, noted that difficulties due to tariffs may have blunted the virus’ effect, saying “the past 14-18 months have already been difficult.”
He doubted that businesses would be affected enough to damage valuations long-term, but the uncertainty could delay immediate deals.
“If you’re in a position where you need to make a deal in the next 4-6 months, you’ll have a harder time.”
According to one packaging industry banker, the effects of the pandemic have not significantly changed the face of deals in the packaging space specifically, as the slowdown in China and the effects of tariffs had already been previously factored into deal making.
“China slowed down before the COVID-19 virus pretty dramatically which was most notably seen in exports that went there; this just adds insult to injury,” the sector banker said.
Woodings Industrial, a Mars, Pennsylvania-based steel equipment manufacturer, has seen some impact on operations as a result from supply disruptions from China. But the company’s CEO, Rob Woodings, said he is not too concerned about the long-term impact of the virus.
He noted that a month and a half ago, supply from China was completely shut down but is now running at around 60% capacity. Products that the company imports from Northern Italy are also still shipping as expected.
“I think there might be a certain anxiety over it, but I think the anxiety might be a bit over framed and that becomes self-fulfilling,” Woodings said.
Martin Aares, who co-heads the private equity platform at the sustainability-focused Closed Loop Partners, said a prolonged economic downturn or crash in the stock market could feasibly scare away investors and temporarily dry up capital for private equity and venture funds. Lowered interest rates will bring down the cost of debt, but too much market volatility could dry up sources of capital.
“We haven’t seen that today, but that’s something we’re monitoring very closely.”
Doesburg with Charles Town Holdings said there is a lot of “dry powder” on strategic and financial balance sheets that could be used in a time like this. It is possible some “bold actors” will drive a spurt of opportunistic M&A activity, he said. But he said he expects conservatism to be the name of the game, resulting in an overall slower process pace over the next couple of months.
“One thing is for certain – anyone who honestly believes that they have figured out exactly what the market is going to do in the short term is delusional.”
by Onofrio Castiglia in Charlottesville, Virginia; Andy Serbe in Los Angeles and Kasia Patel in Chicago
