How Coronavirus Is Impacting Lower Middle Market M&A Activity

Last week, Axial convened a virtual roundtable of members to review the impact of the coronavirus pandemic on lower middle market business owners, M&A activity, and dealmaking. We assembled specialist and generalist investment bankers, corporate buyers and private equity investors (eight in total) to cut across the LMM and understand reactions to the chaos of the past few weeks. What are PE buyers and sell-side bankers doing when it comes to deals under LOI? Are strategic buyers pausing M&A to handle operations? How is the virus impacting industries from healthcare to manufacturing to restaurants to e-commerce and more?

Here are the Axial member attendees. Thank you to each of them for joining on almost no notice and for sharing freely what they’re seeing and experiencing on the ground. 

• Chris Parisi, Carl Marks Advisors
• Rachel Boyton, VERTESS
• Brandon Hinkle, Chicago Capital Partners
• Eric Korsten, Branford Castle Partners
• Craig Korte, Industrial Opportunity Partners
• Neil Johnson, Lawrence, Evans, & Co. 
• Mark Wienberg, Stone Road Capital Partners
• Spencer Berg, Scott-Macon 

Video:

Start at minute 11 if you want to get into the meat of it (the video starts with a round of introductions by its attendees). Quick disclaimer: This conversation was recorded Wednesday, March 11, and plenty has arguably changed since then already; much of the substance here is still relevant. 

Axial Virtual Round Table: Corona Virus and its Impact on the Lower Middle Market from Axial on Vimeo.

Audio:

If you don’t have time to watch, here are a few quick takeaways from the conversation:

1. Deals under LOI are proceeding with maximum urgency or they’re on hold. We’re not seeing a lot of in between. 
2. For deals in earlier stages, there’s definitely a lot of anxiety on the part of sellers and a bit more caution on the part of buyers — there are some who are hitting the pause button to wait and see how the situation shakes out in a few months. But at the same time, buyers remain flush with capital, so there will be others who continue to engage actively on opportunities assuming the worst will be over in a few months (we’re seeing China ramp back up now). For sellers, the advice is to “get as far you can as fast as you can” and beyond that just keep doing what you’re doing and try to keep up operations to the extent possible. If this passes, bankers will be able to pro-forma the disruption. 
3. It’s inevitable that there will be supply chain issues for many companies, but these are fluid and highly variable depending on your business. Companies that rely on China may be in a better position at this point than those who rely on other countries in Europe or domestically as infections ramp up here.
4. Supply chain disruption was less severe than anticipated, with speculation that the Trump tariff activity of 2018/2019 had already precipitated moves toward a more diverse supply chain among both scale and niche manufacturers. 
5. Telehealth, tele-education, e-commerce, and virtualized communication are immediate obvious investment themes, as is distressed special situation investing across energy, leisure, consumer, and other industries.