State of the M&A Market - Lyle Wilpon Global Head of Advisory - BMO.com
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State of the M&A Market Lyle Wilpon Global Head of Advisory
Unprecedented Impact on Global Equity Markets due to COVID-19
TRAJECTORY OF HISTORICAL 20%+ DRAWDOWNS OF S&P 500 SINCE 1920(1)
20-Feb-20 9-Oct-07 5-Sep-00 26-Aug-87 12-Jan-73 2-Dec-68 13-Dec-61 31-May-46 3-Sep-29
--
(5%)
(10%)
(15%)
% Decline
Global 9/11
(20%) Financial 1969 Stock
(25%) 1973 Stock
Post-WWII
(30%) Flash Crash of 1962
Great Depression
(35%)
Black Monday
COVID-19
(40%)
-- 25 50 75 100 125 150 175 200 225 250
Days
CBOE VOLATILITY INDEX (VIX)
90
Global Financial COVID-19
80 High Volatility (VIX>20) Crisis (Feb-20-
(Dec-07- Jun-09) Present)
70 Asian Financial
Crisis (Jul-97- U.S. Debt
Flash U.S Inflation
60 May-99); Russian Dot Com
Crash Dow ngrade Fears &
Ruble Crisis Crash (Mar- U.S.
(May-10) (Aug-11) Leveraged
50 (Aug-98-Nov-98) 00 - Oct-02) Recession
SARS QE ETN Blow up
(Mar-03 - Termination (Feb-18) Fears
9/11 (Dec-18)
40 Attack Jul-03) Fears
(Aug-15)
30
20
10
Low Volatility (VIXDriving Disruption and Declines in M&A Activity
WEEKLY ANNOUNCED M&A TRANSACTIONS(3)
Transaction Volume Disclosed Transaction Value ($bn)
YTD as of May 8
All M&A Announced Transactions(1)
YTD as of March 6(4) # $
Mid-Cap M&A Volume: 1% YTD Stats All Sponsor All Sponsor
All M&A Volume: (25%)
2020 482 81 $174.7 $53.3
2019 756 209 $561.0 $122.5
%Δ (36.2%) (61.2%) (68.9%) (56.5%)
$26
Mid-Cap M&A Announced Transactions(2)
289
270 # $
263 261
YTD Stats All Sponsor All Sponsor
209 $17 2020 129 44 $110.4 $42.2
$15 2019 201 95 $160.9 $76.9
195
$14 188
%Δ (35.8%) (53.7%) (31.4%) (45.1%)
$13 169 138
$12 162 $12
$11
$11 $11
126 120 114
$7 95 99
88
70 73
$4
$4
$3
$2 $2
$1 $1
10-Jan 17-Jan 24-Jan 31-Jan 07-Feb 14-Feb 21-Feb 28-Feb 06-Mar 13-Mar 20-Mar 27-Mar 03-Apr 10-Apr 17-Apr 24-Apr 01-May 08-May
Total disclosed transaction value since the week ending March 13 is down 89%
from the same period in 2019
Source: BMO Estimates, FactSet
2 Note: Market data as of 08-May-2020.
1. Includes all publicly disclosed deals with transaction values since 01-Jan-2020.
2. Includes deals with publicly disclosed transaction values between $200 and $5,000 million since 01-Jan-2020.
3. Includes all complete and pending announced M&A transactions with U.S. targets.
4. Percentage change over the same period in 2019.Key Themes Driving the Shift in M&A Dynamics
CAPITAL Freezing credit and equity markets are challenging transaction execution
PRESERVATION Buyers are focused on preserving capital to ‘weather the storm’
WIDENING OF Buyers unable to underwrite forecasts due to uncertainty
VALUATION
BID / ASKS Sellers who are able to wait are unwilling to sell at distressed valuation levels
Buyers increasing focus of due diligence on supply chain risk, and scope of exposure to
customers in highly impacted COVID areas
OPERATIONAL
Sellers need to be open to purchase price adjustment mechanics to address potential
UNCERTAINTY
deterioration in business operations
Opportunistic buyers may pursue hostile deals or establish toeholds
PHYSICAL Physical lock downs / air travel limitations restrict diligence efforts
LOCKDOWNS Market volatility and operational concerns distract buyers from M&A efforts
Environment causing buyers to look for opportunities to renegotiate
BUYER’S
Many public deals trading well below offer values (high closing uncertainty)
REMORSE
Pending shareholder votes uncertain in unprecedented market conditions
3Impact on Transaction Premiums and Multiples During Distressed Markets
From 1998 to Present
TRANSACTION PREMIUMS(1)
Low Volatility High Volatility Delta
+10% +9% +8% +7% +5% +4% +4% +4% +3% +3% +3% (1%) +6%
It takes a higher premium to do a deal in distressed markets…
33% 35%
32% 32% 32% 32% 31%
30% 29% 29% 29%
27% 27% 26%
23% 25%
22% 23%
20% 19% 21% 21%
18% 18% 19%
16%
Consumer Information Communication Industrials Financials Consumer Utilities Base Metals Energy Real Estate Precious Healthcare Total
Staples Technology Services Discretionary Metals
PURCHASE PRICE MULTIPLES (LTM)(2)
Low Volatility High Volatility Delta
+6.4x +3.9x +0.2x (0.4x) (0.8x) (0.9x) (0.9x) (1.4x) (1.5x) (1.5x) (1.7x) (3.5x) (0.8x)
Evidence of counter-cyclical
nature of precious metals
…but buyers get better value (provided targets don’t
(“Currency of Last Resort”) experience a downward adjustment to EBITDA)
15.0x 15.1x
14.5x 14.5x
13.7x13.9x
12.9x
11.7x 11.6x
10.6x 10.3x 10.8x
10.2x 10.1x 10.0x
9.2x 8.8x 9.0x 9.4x 9.3x
8.5x 8.2x 8.5x 8.6x 8.3x
6.7x
Precious Communication Information Consumer Energy Utilities Base Metals Consumer Industrials Financials Healthcare Real Estate Total
Metals Services Technology Discretionary Staples
Multiples for high volatility periods skewed by historically high
M&A multiples paid during the period of high market volatility
preceding the Dot Com Bubble
Source: FactSet
4 Note: The CBOE Volatility Index (VIX) is used as a proxy for equity volatility; ‘low volatility’ defined as periods with VIX levels below 20 and ‘high volatility’ defined as periods with VIX levels above 20.
1. Median one-day premium paid for North American transactions over $50mm from 1998 to present.
2. Median EV / LTM EBITDA multiple paid for North American transactions over $50mm from 1998 to present; transactions with multiples over 50x EV / LTM EBITDA are excluded.Driving More Usage of Stock as a Form of Transaction Consideration
From 1998 to Present
TRANSACTION CONSIDERATION(1)
All-Cash Transactions All Other Transactions (1) Long-Term Average
100%
Financial
Dot Com 9/11 Crisis
Bubble Attack
75%
Long-Term Average: 61%
50%
25%
--
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
ALL-STOCK DEALS OBSERVATIONS
Long-Term Average: 13%
32% The likelihood of an all-cash transaction is negatively impacted by an increase
Recessionary Periods in equity volatility
24% All-cash deals are more likely in low volatility markets (65% of transactions)
vs high volatility markets (53% of transactions)
20% 19%
17% 18% 19% In a distressed environment, target shareholders may view a stock-based
17%
15% 16% transaction as more favorable due to relative valuation consideration given:
13% 14%
12% 13%
10% 13%
10% 10% 10% 11% Debt financing is often not readily available
9% 9%
6% 6% 6% Buyers are often more hesitant to deploy balance sheet cash given the
5%
uncertainty of future cash needs
-- The buyer and seller relative valuations are likely to be impacted similarly
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 by market swings
Cash scarcity and absolute valuation issues lead to fewer
all-cash transactions in periods of market dislocation
Source: FactSet
5 Note: Market data as of 08-May-2020.
1. Other category is comprised of all-stock transactions and mixed (cash and stock) consideration.And Increases in Protection Clauses and Covenants in M&A Agreements
INTENSE SCRUTINY ON MAC CLAUSES AND CARVE OUTS REAL-TIME SITUATIONS
Prior to COVID-19, pandemics, epidemics and similar terms were rarely
explicitly included as a carve-out to a material adverse change (“MAC”)
Since COVID-19, there has been a sharp increase in explicit carve-outs for
/
pandemics, epidemics or similar health emergencies On April 22, Sycamore Partners filed a lawsuit to back out of its deal to
take over Victoria’s Secret from L Brands
A buyer faces a heavy burden to enforce an MAE clause in order to avoid
the obligation to close Sycamore stated that L Brands violated the transaction when it closed its
stores and skipped rent payments in April
The parties ultimately settled all pending litigation and released all claims
FOCUS ON COVENANTS AND IMPACT OF NON-COMPLIANCE without a termination fee
Covenants require the target to continue operations in the ordinary course
of business and, without buyer’s consent, refrain from certain actions
Increased questions and scrutiny on what is ordinary course in light of the
Pmall.com Business
/
current COVID-19 environment
On April 2, Bed Bath & Beyond asked a judge to hold 1-800-Flowers.Com
Sellers should negotiate for operational flexibility, including exceptions to to a $252mm deal between the companies
address the coronavirus
The sale agreement does contain a MAC though the company has not
invoked it yet
ANTICIPATION FOR DELAYS IN CLOSING
All deals should anticipate delays between signing and closing (e.g.
regulatory, change-of-control, shareholder meetings, etc.)
/
While recent agreements have not included constructs on extending the On April 6, Allegro Merger, a shell company that agreed to take the casual-
outside date due to delays, expect to see extension mechanisms similar to dining chain public in a reverse merger late last year, opted to back out of
those during the U.S. government shutdown in 2019 the deal and return money to shareholders
Future merger agreements should consider appropriate mechanisms to Allegro cited “extraordinary market conditions and the failure to meet
allocate risks of delays in closing necessary closing conditions
Source: Legal briefs from Osler, Hoskin & Harcourt, Cravath, Swaine & Moore LLP and Torys LLP
6Within FCR, Trends are Correlated to Degree of Exposure to COVID
YTD FCR SUBSECTOR PERFORMANCE KEY M&A TRENDS ACROSS THE FOOD, CONSUMER AND RETAIL LANDSCAPE
Food Distribution: Grocery 15.9% 1 WELL-CAPITALIZED BUYERS COMPLETING SELECT LATER-STAGE / BOLT-ON M&A
Some transactions remain on track
Food Retail 4.4% to close, however activity is
generally limited to late-stage,
/ /
strategic, and bolt-on situations
Consumer: Durables (1.0%) New activity generally limited to
one-off discussions and pre-
/ /
Food (2.0%)
process introductions
/
2 CHALLENGED COMPANIES GETTING NEAR-TERM RELIEF FROM PRIVATE EQUITY
Consumer: Personal Care (4.7%) With depressed stock prices and a
Beverage: Alcoholic (7.8%)
record amount of dry powder, PE
firms have made backstop
investments in companies with
/ /
near-term liquidity needs
Beverage: Non-Alcoholic (9.3%) Varying degrees of ‘need’ – some
are taking incremental capital to
/ / Act III
fund future growth
S&P 500 (10.1%)
3 DISTRESSED SITUATIONS DRIVING ACTIVISM, LAWSUITS, AND RESTRUCTURINGS
A prolonged pandemic is Announced Deal Lawsuits
Restaurants (11.7%) exacerbating challenges for some,
Agriculture / Protein Inputs (20.5%)
prompting activism and forcing
certain companies into chapter 11 / Pmall.com /
Activism Restructuring
Some deals have seen lawsuits
filed by buyers looking to exit out of
Food Distribution: Foodservice (41.1%) previously announced M&A
Until there is more clarity on the severity and duration of the Coronavirus impact, it is difficult to
envision transformative M&A transactions in the near term
Source: FactSet
7 Note: Market data as of 08-May-2020.Looking Forward, Key Themes Expected to Drive M&A Activity
Private equity firms are holding a record amount of cash, more than doubling in the last seven years to ~US$1.5
PRIVATE EQUITY trillion at the end of 2019
DRY POWDER AT
ALL TIME HIGH With depressed valuations, private equity firms will look to deploy capital in both take-private opportunities and
private investment in public equity (PIPE transaction)
Opportunity to increase ownership in existing targets where fundamentals remain strong in order to solidify or
STRONG ACTIVIST increase activist influence
INVESTORS / HEDGE
Potential to revisit prior targets given distressed valuation levels (current valuations reduce call on the market)
FUNDS ARE
WELL POSITIONED Activist funds / hedge funds often thrive during market dislocations and are often the first asset class to return in
volatile markets
11-year bull market and high valuations served as natural ‘defense’ for public companies by minimizing returns for
PUBLIC M&A TARGETS acquirors in take private situations
TO REGAIN THEIR
Precipitous decline in public market valuations attracts opportunity and redirects focus away from private assets
‘LUSTER’ VS. PRIVATE where valuation declines are not as evident (outside of distressed situations)
ASSETS
Cash-rich investors already shifting their focus towards public markets (e.g. Brookfield)
WINDOW FOR Market dislocation may serve as a trigger for well-capitalized buyers (public or private) to pursue hostile M&A that
OPPORTUNISTIC M&A exploit near-term vulnerability of target companies
(TAKE-PRIVATE / Hostile activity may also uptick in the medium-term as buyer confidence returns sooner than market valuations
UNSOLICITED) stabilize
Agreement on relative vs. absolute value is easier to reach in the volatile environment
STOCK FOR STOCK
MERGERS Boards more reluctant to support cash transactions at depressed valuation levels, but may take comfort in stock
POTENTIALLY MORE details that retain recovery upside
DESIREABLE
Funding more difficult to secure making cash deals challenging; cash and liquidity are a top priority
8PE Standing Ready, with Capital Available, Seeking Take Private Opportunities
U.S. SPONSOR EXITS PERCENTAGE OF ALL U.S. SPONSOR EXITS WITH >$500MM IN TEV
($ billions) Exit Value Transaction Exit Count
2,500 Recessionary Periods
$445
$419 $406
$396
$367 $368 2,000 75% 73% 75% 74% 73% 74%
69% 71% 71% 72% 74%
$332 69%
Transaction Count
$327
$288
1,500
$250 $254 49% 51%
$207
1,000
$119
$96
500
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020(1) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020(2)
The quantity and value of sponsor-owned company exits tend to Sponsors are less likely to sell larger portfolio companies during
decrease during recessionary periods recessionary periods
ADD-ONS PERCENTAGE OF U.S. SPONSOR BUYOUTS U.S. PRIVATE EQUITY DRY POWDER
$740
73%
67% $610
65% 65% 66%
63% 62% $543
61%
59% 58% $448
57% 56%
$392 $400
52% 53% $369
$491
$322 $329
$378 $377
$326
(2)
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Sponsors are more likely to deploy capital on add-ons than on Take-private opportunities and PIPE transactions expected to occur
platforms during recessionary periods in the near-term as companies are seeking liquidity
Source: Pitchbook
9 Note: Data as of 31-Mar-2020; Dry powder data as of 30-Jun-2019.
1. Last four quarters as of 31-Mar-2020.
2. Year to date as of 31-Mar-2020.Activists Likely to Pursue Distressed Targets, Driving an Increase in Poison Pills
From 1999 to Present
OBSERVATIONS NUMBER OF PUBLIC ACTIVISM CAMPAIGNS(1)
Although there is no empirical evidence of a 100
Global
surge in activist campaigns during market Dot Com 911 Financial
Bubble Attack Crisis Although COVID-19 may prove to be a
dislocations, activists typically use this
period to gain footholds in attractive targets 80 challenging time to formally launch a
at distressed valuations campaign as issuers and governments
focus on public health and safety, it
The global financial crisis saw a drop in 60 represents a compelling buying
publicly announced activism campaigns, as opportunity for future campaigns
activists generally remained on the
sidelines 40
Many hedge funds faced margin calls
and impaired portfolios 20
Activists with dry powder can use crisis
windows as an opportunity to establish
toeholds for future campaigns --
1999
2000
2001
2005
2006
2007
2012
2013
2018
2019
2020
2002
2003
2004
2008
2009
2010
2011
2014
2015
2016
2017
On a relative basis, when all sectors are
down, activists are less inclined to push for NUMBER OF SHAREHOLDER RIGHTS PLAN ADOPTIONS(2)
changes
Poison Pill Adoptions Average Poison Pill Duration (Years)
A break-up strategy becomes difficult as
S&P 500 S&P 500
it relies on achieving a premium Peak to Trough: Peak to Trough: 105
valuation for a specific asset / division (37%) (52%)
95 S&P 500
which may be difficult in an environment 91
86 Peak to Trough:
with few buyers 80
84 83 84
(34%)
Since mid-March there have been 50 70
66 64
shareholder rights plans (“Poison Pills”) 61 60 59
9.7 54 55
adopted 9.5 9.4 9.0 8.9
8.5 44 46
There has also been a resurgence of 39 7.9
37 41 6.9 6.7 6.5
NOL poison pills similar to during the 6.1
financial crisis in 2008 5.1
4.0 3.9 4.0 4.3
3.8 3.6
Similar to traditional a poison pill except 3.1 3.2
it is triggered at lower shareholder 1.8
ownership levels, typically ~5%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Source: FactSet, Activist Insight
10 1. Public campaigns launched against Canadian and U.S. targets since 1999.
2. 2020 shareholder rights plan adoption data as of 08-May-20.Recent FC&R Activism Campaigns and Shareholder Rights Plan Adoptions
RECENT ACTIVISM CAMPAIGNS RECENT SHAREHOLDER RIGHTS PLAN ADOPTIONS
% Change in YTD % Change in YTD
Share Price(1) Share Price(1)
NAS: BLMN NAS: CHEF
(49.2%) (64.2%)
NYSE: CMG NYSE: CHS
10.6% (64.0%)
NYSE: GNC NAS: PLAY
(79.3%) (71.4%)
NYSE: MCD NYSE: EXPR
(8.3%) (63.0%)
NAS: PPC NYSE: SIX
(34.9%) (53.0%)
NYSE: TJX NYSE: HGV
(20.6%) (44.5%)
Source: Activist Insight, FactSet, public filings
11 1. Share price data as of 08-May-20.Key Indicators of a Broader Re-Start
BEGINNING OF U.S. starts to reopen the economy as states begin to phase out of stay-at-home orders
SOCIAL DISTANCING Loosening of restrictions will allow for businesses see more foot traffic, as well as allow for
EASING overall business travel and in-person diligence
As the economy begins to reopen unemployment claims are likely to taper off
UNEMPLOYMENT
REDUCTION As unemployment begins to stabilize, consumer discretionary income spending to reverse
over time
Throughout April, credit markets overall have grown more stable, supported by the Fed and
CREDIT MARKET Government backed economic-recovery packages
STABILIZATION Broader availability of acquisition financing key to giving sellers conviction to ‘re-start’
processes
PREDICTABILITY OF A gradual reopening of the U.S. economy may stabilize unpredictable consumer spending
AND CONFIDENCE and alleviate supply chain disruptions
IN SELLER Increased consumer consumption may normalize purchase behavior back to pre-COVID
PROJECTIONS patterns
Source: Department of Labor, Statista, BMO Capital Markets
12Assessing the Potential Length Until Sustained Recovery
From 1998 to Present
DEAL VOLUME BY QUARTER(1)
600 Global M&A activity has typically
Dot Com 9/11 Financial
Bubble Attack Crisis
rebounded within 2 to 4
COVID-19
quarters post crisis
450
300
150
--
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
INDEXED TRENDS DURING PAST RECESSIONS(3)
The Coronavirus crisis has impacted the markets Coronavirus Great Recession Dotcom Bubble
much faster relative to the last two major recessions:
The recent S&P 500 decrease is consistent with Indexed S&P 500 Indexed Monthly Deal Volume
the drop that was experienced after Peak to Trough: Peak to Trough:
approximately one year during the Great 120 31 Months 120 18 Months
Recession and after approximately two years
during the Dotcom Bubble 100 100
However, U.S. equity markets have been surging for
the last three weeks, driven by the combined efforts 80 80
of the government and Federal Reserve to pull the
economy out of choppy waters
60 60
Deal volumes have historically been impacted more
rapidly than the S&P 500 by the downturns; however,
they also have recovered more rapidly 40 40
Approximately six months after the market peak Peak to Trough: Peak to Trough:
prior to the Great Recession, deal volumes were 20 17 Months 20 14 Months
down ~33%, compared to ~15% on the S&P 500,
though they returned to the original peak levels a -- --
little over three years later 0 5 10 15 20 25 30 35 40 45 0 5 10 15 20 25 30 35 40 45
Months Since S&P 500 Peak Months Since S&P 500 Peak
Source: FactSet
13 Note: Market data as of 08-May-2020.
1. Aggregate North American transaction volumes and values over $50mm by quarter from 1998 to present.
2. Financial buyers as a percentage of total transactions.
3. Public sellers as a percentage of total corporate transactions; asset sales are excluded.How Can Companies Prepare?
DEFENSE OFFENSE
Activism is on the rise in the U.S., especially For auctions that are still ongoing, continue
heading into AGM’s engagement and diligence efforts but
Maintain potentially lower purchase price
Activism Defense Assemble a team to establish a defense plan
Diligence Efforts For transactions with fundamental business
Monitor and engage shareholder base
rationale, create preemptive discussions
Carry out regular vulnerability checks from auctions that have hit the pause button
Mitigate time advantage by preparing
Reassess if previous targets continue to
organizational actions today
have strong fundamental rationale
Involve the Board and engage investor base Reassess
Hostile Defense (more likely to succeed with supportive Attractive targets that were previously
Previous Targets
shareholder group) contemplated may be vulnerable and are
more likely to transact
Revisit a shareholder rights plan (U.S.)
Streamline operations to preserve cash flow Opportunity to acquire or invest in targets
Preserve Balance Approach New with strong fundamentals / outlook if they are
Revisit capital programs and dividend facing near-term liquidity constraints or
Sheet (Weaker) Targets
distributions issues
Companies in need of cash can potentially
benefit from an investment from either Preserving cash and maintaining low
Proactively Seek private equity or strategic (white squire
Preserve
leverage positions buyers to be nimble and
Strategic defense) Liquidity for acquisitive in this market or when
Investments Customary standstill and governance to Future M&A uncertainty subsides
align company and investor
Boards and management teams should assess company’s current situation
and adopt defensive and/or offensive measures in response to the crisis
14Disclaimer
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