Verde Corporate Finance
In this article, Craig Blackmore of Verde Corporate Finance (part of the GS Verde Group) shares his thoughts.
There have been wide ranging business implications caused by Covid-19 and the subsequent lockdown restrictions.
New ways of working, furloughed workers, reduced demand for some and increased demand for others, the list goes on and on.
With such exceptional circumstances almost becoming the norm (you work that one out!), it can be difficult to think back to how things looked just a few months ago.
M&A activity dropped like a stone in April with leading M&A analytics platform, Mark to Market, reporting a 58% fall in deal numbers as compared to May 2019. And when you consider that deal numbers just prior to lockdown in March were on a par with a year earlier that is a startling drop.
Hopefully, this is just a temporary hiatus with many predicting that M&A will be subject to the V-shaped recovery everyone is hoping for. The longer-term impacts could provide more difficulty though.
With so many businesses experiencing roller coaster impacts, skewed financial results can hit company valuations which are based on those results. Valuations can be unpredictable or even questionable at the best of times. But Covid-19 presents an all-together new valuation challenge. How do you treat the impact of the pandemic when valuing a business?
What started out as a bit of a social media joke appears to be turning into a new valuation metric, as instead of valuing on a multiple of EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation), we are now seeing the emergence of EBITDAC – with Covid-19 being tagged onto the usual acronym. The idea is that Covid consequences are eliminated from valuations and numbers are based on what would have happened had the pandemic not been around.
At first glance, this seems a sensible way of looking at things, as the pandemic influences would be manufactured out of results bringing them back to normality. But then where does this end? Is there an EBITDAR – where R sees us Return to work and deal with the after-effects of lockdown and new working practices until we reach our new normal? Or what about EBITDANN when we enter the New-Normal and reflect that in current or earlier numbers?
Businesses have definitely seen exceptional times, depending on what sector you look at, there have been some very good and very bad times – and as we return to work post-lockdown, surely we will look back on that period as the exception to the rule. But how long will the effects of the pandemic be felt? Will things like social distancing be so detrimental to some sectors that there is no coming back? Will Covid-19 implications affect valuations for years to come?
This could well bring into question the use of EBITDA, or indeed EBITDAC, as a valuation basis. Has it just been easy to use and is it actually appropriate anymore? Particularly where profits are volatile, can accurate calculations be made of ‘what profits would have been if not for Covid’? Surely, there is wide scope for subjective treatment here?
To go a bit further, the magic multiple (the Holy Grail of information for the valuation) is usually the most sought-after number. Sellers want the highest and buyers want the lowest numbers in the range, so where will the new middle be between these two? Usually basing this on P/E ratios of publicly traded entities (which are not immune from the pandemic amidst record hits on stock exchanges) will we have to take a view on Covid-19 impacts here also? More subjective decisions lay in wait here I feel.
I do not normally write something where there are more questions than answers, but this is an area where we continue to step into the unknown. As time goes on, monitoring market activity will be key to determine whether the pandemic was a bump in the road or now presents a whole new set of potholes! I guess we just will not know that for some time yet.
Craig Blackmore is a Director of Verde Corporate Finance, which also part of the GS Verde Group. If you would like to talk about valuations, or to speak to Craig and his team please contact [email protected] or call 029 2240 3445. You can also click here for one of the team to call you back.