Optimizing the Outcome: Dealmaking in TMT During COVID-19

Software deals closed since late April 2020

 

Select Recent Harris Williams Deals in the Software Sector

As we recently observed in Nuances of the Deal in the COVID-19 World, additional effort is required to complete M&A transactions in the current environment. Specifically, we noted that a redoubled emphasis on transparency, responsiveness and flexibility is more essential to dealmaking than ever before.

In the intervening weeks, the importance of this high-touch approach has only been reinforced. As members of the Harris Williams Technology, Media & Telecom (TMT) Group share here, their transaction activity in the second quarter—during the initial onslaught of COVID-19—was facilitated by a heightened focus on three essential areas: engaging high-potential buyers early, driving valuation in a volatile financing market, and fostering transaction momentum and advocacy. And while these transactions are TMT-focused, we believe the insights they yield are widely applicable across a variety of industries.

Engage High-Potential Buyers Early

“During the last few months, we have seen a highly volatile macro backdrop,” says Mike Wilkins, a managing director. “Along with increased uncertainty in the near-term business climate, that has made buyers and sellers very cautious. Given this, it’s critical to know which buyers have a keen interest in a particular situation, as well as how to maximize their engagement. Right now, the most active buyers are in two camps: well-capitalized strategic buyers and financial sponsors pursuing a thematic investing approach.”

Wilkins says that strategic buyers generally understand end markets deeply enough to see past temporary challenges posed by COVID-19, and have a well-developed long-term vision for the companies they’re pursuing. Likewise, financial buyers use deeper industry knowledge and well-informed investment theses to minimize perceived risk and execute transactions with confidence during uncertain times.

“We are increasingly connecting sellers with high-potential buyers—virtually, of course—in advance of a likely exit,” adds Thierry Monjauze, a managing director. “That allows relationships to develop and can streamline the path toward a transaction.”

Early engagement also enables buyers, sellers and advisors to do the legwork required by today’s more extensive due diligence processes. “We’re not just facilitating rigorous diligence, we’re also making sure that critical diligence data is presented proactively and in a format that's easy to consume,” says Monjauze.

Buyers have expanded their view of what due diligence should encompass, says Wilkins: “It's not the top 10 list anymore—now it's the top 20 list. Gathering all of that information and delivering it to buyers quickly is essential to building trust and engagement.”

Monjauze adds that deal teams are adjusting their diligence processes in real time based on changing conditions and sentiment: “They are reprioritizing based on what they’re hearing from buyers, and what buyers are hearing from their constituents, including boardrooms, investment committees, advisors and lenders.”

Drive Optimal Valuation in a Volatile Financing Market

Monjauze says today’s market uncertainty has not depressed values in TMT: “On our most recent software deals, we’ve seen valuations to be similar to pre-COVID-19 levels.”

“Sellers still have a leg up, because they can decide not to transact if an appropriate price is not there,” says Wilkins. “Buyers need to think creatively about how to entice sellers to transact while mitigating their own deal concerns.” 

It’s also important to cultivate alternative funding sources, says Wilkins. “During much of the second quarter, the traditional debt markets were very challenged. Equity has made up for some that, but over-equitized deals typically receive more scrutiny internally at the buyer. That compounds the already heightened focus on diligence and the sellers’ ability to satisfy buyers’ requests.” gettyimages-542561057.jpg

How can buyers discern between short-term, COVID-19-linked disruptions and longer-term issues with a business and arrive at an appropriate value? Sophisticated data analysis is increasingly the answer, playing a central role in more transactions. “The more data-driven you can be, the better,” says Monjauze. “But that analysis has to happen at deal speed, and it has to be packaged and presented in a way that helps buyers make quick and confident decisions.”

While detailed data is necessary to achieving an optimal outcome, it’s not sufficient on its own: A long-term perspective on the industry and company is also essential. “There’s substantial value to be created by buyers who can see the long-term potential of a business right now,” says Monjauze. “High transaction volume leading up to COVID-19 left many buyers with well-informed views of sectors and companies—including an acute understanding of valuation dynamics. There are subsectors that less-informed buyers are shying away from. Contrarians who can see past the next couple of quarters have a real advantage.”

Foster Transaction Momentum and Advocacy

“In this environment, it’s really important to make sure that all stakeholders on both the seller and the buyer side are aligned and onboard,” says Wilkins. “You don’t want someone coming to the last investment committee or board meeting and throwing a wrench into the works.”

How do you prevent that? “This goes back to the importance of engaging early and being very responsive and comprehensive during diligence. Identify dissenting views, understand them and address them to the fullest possible extent with data,” Wilkins explains. “Making sure you answer all questions upfront is critical to preventing last-minute surprises.”

Monjauze adds that when late-stage concerns do arise, empathy and responsiveness are key: “You’ve got to be a good listener, address buyer concerns and reassure them along the way. This can be a stressful time to be making investments.”

In this environment, buyers are very interested in the “story” of the company, particularly in terms of future growth potential. “The data and the buyer’s knowledge of the space are important, but it’s incumbent upon the seller to tie everything together into a compelling narrative,” says Wilkins. “Why does this business exist, and where can it go in the future? What’s the opportunity for organic growth? For additional investment and M&A? You want to end up with an energized group of people—sellers, buyers, board members, lenders, etc.—all leaning into the transaction.”

Published July 2020