Pursuing M&A in a Changing Environment

Whether companies are looking to buy or sell, valuations will be pivotal. Interest rates are still low, and there is excess capital and debt in the market. When valuations rebound to what is expected, some business owners will sell to gain liquidity. Due to these factors and the promise of more widespread COVID-19 vaccinations, M&A is expected to increase significantly in the second half of this year.

There are essential steps all companies should take when conducting M&A.

The first step in any deal starts with a clear understanding of your company’s strategic intent and how a merger or acquisition fits into that corporate direction. Are you filling gaps that were exposed during the crisis, or growing in an area aligned with changing circumstances? Is it more cost-effective to evolve through a deal than to do so organically?

Engage your stakeholders early and consider outside expertise.

Ensure your management team has a highly skilled set of advisors to guide them through the deal. Lawyers, bankers, communications firms, government relations specialists, HR consultants and others are critical to the process.

Anticipate evolving regulations

The regulatory steps associated with M&A vary from jurisdiction to jurisdiction, and these regulations are tightening, especially globally around privacy and security. Organizations need to keep an eye on these changes, particularly as businesses look to diversify their supply chains and governments look for new revenue streams to counter or prevent future similar losses from the pandemic.

Create, build or maintain a strong culture

Evaluate the leaders at an acquisition target; find the exceptional talent and try to retain them. After the deal, take steps to ensure the positive aspects of both cultures remain.

Flexibility to Pursue Growth

Companies may find themselves in growth mode but may not fit a traditional lending profile. They may have concerns about the impact of a deal to their liquidity, or their performance may not align with their bank’s capital requirements.

For those companies, there are flexible financing options available.

Mezzanine financing “sits” between debt and equity on the balance sheet and has features of both. For companies that have exceeded (or want to preserve) senior debt borrowing capacity, need capital to grow and do not want to raise outside equity, mezzanine financing can be an ideal solution. Benefits of mezzanine financing include:

• Flexibility to use capital to expand company operations since collateral is not required
• Ability to reduce or pay off debt to cover cash flow requirements
• Higher rates of return on investments
• Increased stock value

Asset-based lending (ABL) is a form of financing primarily collateralized by accounts receivable and inventory but may also include equipment and/or other property, with less covenants and greater flexibility than is typically available in a commercial structure. ABL can expand borrowing capacity for an asset-rich business with cash flow limitations, empower growth or free up liquidity to accommodate working capital needs.

Learn more about the range of financing options available in the “Expand your Business” section of the Business Knowledge Center.

FNB’s Relationship Managers are well positioned to work with you to determine whether mezzanine financing, ABL or another tailored financing package is the right choice for your situation.