March 11, 2020
As uncertainty related to COVID-19 accelerates, we thought it would be useful for us to communicate what we are seeing, feeling, and experiencing. As an organization headquartered in the Pacific Northwest and operating daily in the M&A and capital markets, we are seeing some disconnects between perception and reality as it relates to our region and business. Our desire is to give you a view from the “front lines.” We believe knowledge is power, and decisions are best made using the most complete information available. Our goal is to help you think about how to manage your business against this backdrop of uncertainty.
As of today, Seattle has been one of the most heavily impacted areas of the country as it relates to the virus outbreak. Like other local organizations we are taking the necessary precautions. Our primary concern is the health and wellness of our employees, clients, partners, and community. We feel for everyone being affected both directly and indirectly. If there is a silver lining, we are seeing our community react in constructive ways. There is truth to the adage that crisis has the ability to bring people together. It also can stimulate creativity. We are embracing new methods to run our daily business and interact with our clients and counterparties in ways that manage risk, as opposed to accelerate it. For the most part, our transaction processes have not experienced disruption.
One thing we are learning from this experience is how those outside our region perceive us based on the media’s characterization of our reality. Compared to mainstream national media sentiment, on the whole, the mood locally is more optimistic, albeit cautious, than melancholy. In large part people are going about their business, putting one foot in front of the other. Things continue to get done, though the processes through which this is taking place have morphed in an effort to appropriately manage risk.
It may be months before we return to business-as-usual, but our view is that we are not facing structural issues that will take multiple business cycles to remedy. We entered this crisis on solid economic footing. The contraction may be steep, but we believe it will be quick. Once testing is widely available, systemic responses can be pursued with greater effectiveness and fears can be better allayed as facts replace hyperbole.
At Cascadia, our view of the markets is a function of what we are seeing through our clients’ processes. As such, we offer you the following perspectives and insight:
• We expect to see transaction processes elongate but the M&A and financing spigot will remain open for the middle market. Yes, in some sectors of the market things will slow or even grind to a halt, much the way we have seen sectors ice over running into macro policy shifts. Processes targeted towards foreign buyers and public market participants, that involve economically sensitive business or that are heavily reliant on discretionary spending will be the most exposed. However, if the credit markets continue to be fluid, the market for our clients’ businesses is expected to remain strong. Private investors are sitting on a record $1.5 trillion of dry powder, according to Prequin, making private equity and their portfolio companies best situated to take advantage of an M&A or financing dislocation.
• Based on recent deal closings and bids on “in process” mandates, valuations remain stable. It’s natural to have concerns about what something is worth when uncertainty manifests itself. However, thus far we have seen buyers be both thorough and thoughtful with respect to assessing virus related risks. Supply chain redundancy has quickly become a primary topic of interest in due diligence. The market is telling us that the current thinking is that the timing of revenue and profit realizations are likely to be delayed, but not lost. Should the situation accelerate to the negative or impact consumer behavior in more meaningful ways, we think it will result in paused processes or the introduction of performance-based deal structures.
• Some businesses will abnormally benefit from market changes brought about by the virus. However, one must separate near term profitability realized through reactive behavior and long-term sustainable performance. For example, companies who can open new end markets are likely to see value appreciation more so than businesses experiencing excess near term demand driven by individual concerns about health and wellbeing.
• We believe this may be a unique opportunity for sellers to become buyers. Over the course of our 20 years in business, we have learned that major dislocations often provide opportunity to position a business for accelerated growth once conditions normalize. Some of our longstanding relationships are using this as an opportunity to engage with similarly situated competitors to determine if a business combination makes more sense today than previously. Operational synergies that might be realized from a small to medium-sized combination offer a compelling way to create value, even if revenue or profit growth slows.
Like so many others, we are experiencing challenges related to COVID-19, and the associated uncertainties. We are hopeful the situation normalizes in the coming months. At the same time, we encourage business owners to look at the situation and think about ways they can strengthen their business to ensure durability. In our next communication we will highlight some aspects of your business that may merit evaluation in this context. Should you be interested in having these conversations sooner rather than later, do not hesitate to reach out. Our industry teams can speak with you about conditions, issues or opportunities most relevant to your company.
Chief Executive Officer