M&A opportunities for SMEs with creative deal structures

M&A opportunities for SMEs with creative deal structures
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Asia-Pacific M&A deals increase 3.4% in Q1 despite global deal activity decline. Could COVID-19 cause an M&A surge for US SMEs for Q2?

Reece Tomlinson, CEO and Founder of RWT Growth, comments on the opportunities presented to SMEs in an unprecedented economic climate.

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Q1 2020 hedge fund letters, conferences and more

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GlobalData, which tracks all M&A, PE/VC and asset transaction activity around the world, reported yesterday that despite the overall deal activity declining among other regions, Asia-Pacific bound total deals volume increased by 3.43% in the first quarter of 2020. In terms of value, JP Morgan advised US$20.1 billion worth deals in Q1 2020 with Deloitte occupying the second position with six transactions worth US$12 billion.

However, back at home, many businesses may be struggling or relying on government support to survive. Others, however, may have seen a sharp rise in the demand for their products or services, and will now be considering how best to move forward and grow in the coming months.

Mergers and Acquisitions (M&A) are often an effective tool for businesses to take a significant step forward in growth or expansion into other markets. Already in Q1 there was a 35% global drop in the value of global M&A deals, but for some, now may be the perfect time.

Reece Tomlinson, CEO and Founder of RWT Growth, financial advisors for the global SME arena, sets out his reasons why now might be the perfect time to make a deal:

1) Distressed opportunities.

Distressed opportunities can generally be defined as assets and entities that are experiencing financial or operational distress, default or in the process of bankruptcy. This represents a real opportunity as many SMEs are in states of distress.

These opportunities represent the best single method for acquiring large scale value with a comparatively minimal spend as they can be acquired for large discounts to their actual value.

2) Cheap debt.

In almost every western country, interest rates are near zero with numerous government funding options to help ensure businesses remain open and operating. These programs mean the ability to access debt for strategic M&A deals will be profound.

3) Creative Deal Structures (little or no cash) will be welcomed.

Historically, the majority of M&A deals required cash levels that were equivalent to 10% to 20% of the deal value with the remainder of the deal being comprised of some form of debt. This was due to the fact that for many healthy SMEs they would not sell their company without an attractive offer. However, given the impacts of COVID-19 and the points I have brought up in this article, there has likely never been a time in history where M&A deals can be made more creatively than there is now.

What this means is simple. SMEs can likely perform M&A deals even though they themselves are not sitting on piles of cash.

4) M&A can make the business less risky.

In some cases, completing M&A deals may reduce the operational risk that COVID-19 presents for SMEs. M&A can, when executed properly, increase profits by benefiting from the synergies between the acquirer and the seller. These synergies can often reduce the overall operating costs and lead to higher margins.

5) Baby boomers.

Baby boomers own roughly 2.3 million SMEs in the US. One could argue that many baby boomers who are being negatively impacted by COVID-19 will be eager to sell their companies.

As such, SMEs owned by baby boomers reflect a real opportunity to complete M&A deals at favourable valuations and with creative deal structures.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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