What will be the effect of the Coronavirus epidemic on the mergers and acquisitions (M&A) sector for small and medium-sized Italian companies?

It is still early to make detailed forecasts, but we can make some considerations, assuming that in September we will return to a climate of relative normalcy.

  • Many Italian SME companies are managed by the founder’s family – perhaps no longer very young – and sometimes there is no prospect of succession within the family.
  • The shock caused by the pandemic will lead to reflection on the fragility of companies of limited size, which may not be able to absorb the impact of unexpected events by themselves, stimulating mergers and aggregations.
  • The migration of several activities towards online solutions to face the emergency has highlighted the need to go beyond the routine management of the past, reinventing and modernizing ways of working.
  • The stress on corporate finance could be a further motivation for owners to consider selling the company or integrating it into a larger and more solid group.

Further considerations suggest that there will be a significant recovery in M&A activities:

  • Investment funds continue to have high capital availability, raised but not yet invested. They will seek to accelerate transactions to enrich their investment portfolio.
  • Companies that are solid and well positioned will profit from the foreseeable wave of liquidity made available to exit the crisis, to continue an expansion strategy with external growth. They will acquire SMEs that bring market, product, production capacity or geographic coverage expansion.
  • The supply crisis that we have experienced on critical materials (from face masks to respirators) will push to strengthen local productions, making the acquisition of manufacturing companies attractive.

What are the effects on the negotiation of M&A transactions?

Clearly there will be a problem to reconcile the valorization expected by the sellers and those proposed by the buyers, due to the extraordinary situation faced in 2020 and its impacts on turnover, profitability and corporate debt.

How to deal with this problem without penalizing the valuations excessively downwards? It will be necessary to prepare an ad hoc negotiating strategy, which leads to recognizing a valorization on the basis of the “typical” management of the company, adjusting for the impact of the period of company downtime or reduction of activities.

Most likely it will be necessary to review the buying and selling strategies according to new and more sophisticated rules.

Your M&A advisor will play a central role in guiding entrepreneurs in what can be a new world.