Palo Alto – March 18, 2020 – The current mayhem caused by the Coronavirus Pandemic is unprecedented in our lifetimes. As markets gyrate, some businesses close while others implement business continuity plans, and people across the world shelter in place, the team at Woodside Capital Partners circled up this week and asked “What’s Next?”, especially in the areas of strategic partnerships, M&A and financing. Here are some of our observations:
Companies are adjusting to a new normal. Strategic acquirers – which only 10 days ago were operating business as usual – are currently in shock and adjusting to a new normal. Managers are working to ensure that their teams are safe and that day-to-day operations continue as best as possible, despite employees working from home. Executives are looking closely at cash, short term investments and receivables to ensure that they have sufficient liquidity. Cost controls are being enacted. Dialogue is ongoing with supply chains / suppliers who are impacted by their own employee and virus-related issues, with some parts of supply chains slowing or freezing. Sales executives are in contact with customers, seeking understanding about where customer businesses are headed, and most often answers are steeped in uncertainty combined with best intentions – we don’t know, but we’re doing the best we can (… and yes we’re aware that we haven’t paid that invoice yet). Stock prices are gyrating and most companies’ market capitalizations are off 20%-30% or more from a month ago and may have further to fall given uncertainty. Meanwhile, executives working from home are being regularly interrupted by well-meaning kids with questions like “Can we have pizza for lunch?”. And all with the overlay of government pronouncements and news reports saying that the situation is likely to get worse before it gets better.
This crisis is the same as others, but is also quite different. Most big economic disruptions start with an idea like “More debt? No problem!” or “Mortgages are totally safe – house prices can’t go down” or “Tech stocks can grow to the sky”. Then there is a tipping point and sentiment turns dark with market volatility following close behind. Interestingly, this time really is different – because the coronavirus is not just an idea, it’s a real thing, and much is uncertain about how it will be resolved. But regardless of timing, at some point, it almost surely will get resolved, and we will get through this – that’s why it’s the same. Moreover, the fundamental benefits of the innovation ecosystem continue – and therefore, the fundamental opportunity presented by the ecosystem also continues.
Washington DC seems to have woken up, and that’s a good thing. “Business as usual” in Washington DC most often involves some form of gridlock – there’s a lot of talk, and not much really gets done as officials mostly focus on their own reelections, fundraising, and party politics. But when a truly serious crisis happens, it seems that our elected officials wake up and understand that radical action is needed to avert disaster. The virus crisis seems to be no different, with governments taking action on both the health/science front, and on the economic front. At the time of this writing, the White House and Congress are discussing allocating $1 trillion to address the economic crisis, and have implemented many initiatives to address the public health implications of the virus.
The smartest executives continue to keep an eye on the long-term future (if they can afford to right now). Most companies are distracted by their own internal continuity at the moment – but the smartest/most able companies are still allocating resources to look over the horizon. We’re seeing this in Woodside Capital Partners’ ecosystem – just last week we entered an engagement with a large Bay Area-based strategic acquirer on a buyside assignment, to help them search for companies for acquisition. On our weekly status call on Monday, as the Dow Industrials dropped 3,000 points, their message was “go for it” – in spite of the virus.
Most strategic acquirers with sufficient cash on hand will start looking for new acquisition opportunities in coming months, betting that companies addressing interesting technologies or interesting markets will be “on sale”. One of our key team members was formerly a senior corporate development executive for more than a decade at a top tech company, and she reports that the financial crisis of 2008-2009 saw the busiest strategic activity in the company’s history, seeing both a large volume of transactions, and the largest deal ($1B+) completed in the company’s history.
In venture-backed companies, smart management teams and investors will move quickly to address their strategic positioning. During the great bull market that just ended, valuations of private tech companies climbed to unprecedented levels, especially in the later stage. If the downturn is protracted, and if history repeats itself, acquisition prices will likely decline, capital will be harder to raise, and it will take time for some sellers to adjust their expectations to lower valuations. Smart management teams and investors will move quickly to get their companies to breakeven, acquired, or both.
We still expect a lot of acquisitions. According to CapitalIQ data since 2000, there are between 3,000 and 5,000 tech acquisitions each year, with more acquisitions during economic boom years, and fewer acquisitions during economic recession years. The key message is that there were still around 3,000 acquisitions during both the Dotcom Bust and the Financial Crisis. The number of acquisitions during this crisis is likely to fall in this range.
We expect that investors’ decreased risk tolerance will be a driver of M&A. A historic amount of capital is still available to deploy – both on the balance sheets of strong companies, and in the coffers of PE and VC firms. However we expect that investors will look more closely at risk in the coming period. Most emerging growth companies will find it harder to raise capital at premium valuations, and weaker companies – especially those in crowded sectors – may not be able to raise capital at all. We expect this to result in more companies coming to market for acquisition.
We expect strategics to divest more. As seen in the immediate aftermath of the Financial Crisis, we expect that in coming quarters, shareholders will increasingly demand focus from management teams on divisions exhibiting greatest opportunity, and therefore strategic acquirers will more actively review their portfolios and divest operating divisions that are low performing or non-core, focusing lean resources on high-growth assets. This will be an opportunity for acquirers who seek divestitures.
We believe that more companies will make artificial intelligence / machine learning part of their core operations, and this will drive M&A. Global companies with traditional sales and supply chain infrastructures will revisit their strategies and business models in coming months and – after mostly giving lip service to AI/ML for many years – will invest more in AI/ML enabled platforms via acquisition to improve their existing infrastructure and systems.
We expect more M&A in the healthcare and digital health sector – as the virus crisis results in major changes in health-tech and overall patient care. Our healthcare team – Asli Aras, Juliesta Sylvester, and Vini Jolly – believe that a shift is expected toward a more holistic approach to patient-centered outcomes and using patient data in integrated platforms. Additionally, molecular diagnostics testing is expected to grow, especially the development of biomarkers that give effective results with high accuracy and efficiency. Both home-based diagnostics testing and tele-medicine are expected to also see significant growth, also leading to more acquisitions. Moreover, we believe that one of the biggest challenges to the current healthcare system will receive greater scrutiny because of the crisis – that is, improving the speed and scope of insurance coverage and reimbursement models.
We note that economists are still optimistic. Despite the high volatility in markets, a majority of economists are still projecting that the US economy will contract by 2-3% in the first half of 2020 before picking up in the second half of the year and exceeding 3% growth in 2021. This includes a baseline assumption that a comprehensive fiscal stimulus ($750B+) is put in-place. (For reference, the 2009 stimulus package was $787B.)
We’re in a Black Swan crisis today, but we anticipate that M&A and equity participations will pick up as the market adjusts to the new normal and as the impact of the pandemic decreases. Many strategic acquirers will come out of the crisis with strong cash positions. PE firms already have record cash levels that will need to be deployed. We expect there will still be significant M&A and investment in innovative technologies, and expect more divestitures.
Life will go on, the innovation ecosystem will continue, new wealth will be created – although things will be challenging for a while. We at Woodside Capital Partners feel compassion for those who are suffering, and we also stand ready to help, if you need it. We’re in our 20th year, have weathered multiple crises over the years, and are prepared to advise you or your company as helpful.
On behalf of the entire Woodside Capital Partners team – stay safe and healthy.
WCP: Leading M&A and capital raising advisor for tech companies since 2001. Securities transactions are offered through Woodside Capital Securities LLC, a registered broker-dealer and member of FINRA (www.finra.org) and SIPC (www.sipc.org). Woodside Capital Partners International LLC and Woodside Capital Securities LLC are affiliated companies. NOTICE: This e-mail does not constitute an offer or solicitation with respect to the purchase or sale of any security in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. This e-mail may contain confidential or privileged information. If you are not the intended recipient, please advise the sender immediately and delete this message.