Have you considered using M&A for growth equity, to find a capital partner, change the nature of your business, or improve your competitive position? With everything going on in the world, is M&A still a good option for you?
In order to answer these questions, Global Wired Advisor Managing Partners Chris Shipferling and Jason Somerville teamed up with Savvi in a virtual workshop: Impacts of Covid-19 on Startup M&A. They discussed eCommerce outlook, how to succeed in this new world, and M&A market themes. The focus here is on eCommerce, however, the points discussed can apply to a variety of digitally based industries.
Here’s a recap of the workshop:
Current eCommerce outlook
- In 2020, eCommerce penetration of sales had 10 years worth of growth in just 3 months.
- Amazon traffic was up 8.7% Year over Year in July 2020 and was up 28.1% in February 2020.
- Marketplace sellers averaged $160k in sales by end of year May 31st 2020 vs $100k last year.
- 4th quarter 2020 Holiday sales for eCommerce are set to make another record with 7.4 million new digital buyers.
With all of this growth, will it stay?
The trends tell us that we will see a pull back to brick and mortar stores post COVID-19. In fact, we are already seeing this as quarantine restrictions are lightened in some areas. However, a paradigm shift has occurred. Quarantine taught 7.6 billion consumers how to shop online. Studies have shown that it takes 66 days to create habitual behavior, and the US has been in quarantine for over 3 times that long. The habits formed during this time aren’t suddenly going away once quarantine ends. Furthermore, it is forecast that brick and mortar retailers will continue to go bankrupt. This will continue to push consumers to shop online. (Source: The Wall Street Journal Economists Survey – October 2019.)
Who succeeds in this new world?
Who is currently winning in this new world?
- Across almost every category, eCommerce sales have jumped and will continue to grow as the country opens up.
- New innovative brands set up for digital growth are seeing customer loyalty shift towards them, away from large household brands.
- SaaS businesses that help digital businesses grow are seeing notable growth.
How can I enable my company to succeed in this new world?
The way to enable your business to continue to grow is by adapting to and learning from this paradigm shift.
- Adapt to a digital first consumer.
- Observe how the new customer is shopping. There are a lot of new shoppers who you can serve and learn from. Make sure you understand your data.
- Understand your ideal customer. Create new metrics that capture a more subjective understanding of your customer: sentiment, satisfaction, etc.
(Source: The Wall Street Journal Economists Survey – October 2019.)
M&A macro data for the 1st half 2020
- Total first half deal activity was down 53% in terms of total value and down 32% in terms of deal volume compared to 2019.
- The 2nd Quarter of 2020 showed a particularly sharp decline, with deal value 69% below 2019 and deal volume 49% lower.
- Deal volume in early 3rd Quarter is seeing some recovery, and activity overall is expected to pick up through the remainder of the year. As the economy and businesses recover, the M&A market does, too.
Bottom line: the M&A market went into quarantine with the rest of the world. In sectors that were negatively effected by COVID-19, few deals are getting done. The deals that are getting done in these sectors are at lower valuations and certain sectors are moving into the “distressed” territory. The change in deal activity in these sectors pull down the numbers when looking at macro data. When we look at M&A data for sectors that help people do things from home, such as eCommerce, we see a bit of a different story.
M&A eCommerce data for the 1st half 2020
The eCommerce M&A market was down in the first half of 2020, but not as much as the macro M&A market was. Chris and Jason personally saw a decent amount of eCommerce M&A activity in the 2nd and 3rd quarters of 2020.
- Total first half deal activity was down 32% in terms of total value. However, when one “mega deal” that occurred during the second quarter of 2019 is removed, total deal value actually increased year over year.
- Total volume of deals was down 25% in the first half of 2020.
Bottom line: the M&A markets are like “the tale of two cities”. The the digital market is doing much better than the macro market. In fact, there are a few key factors driving the M&A market that suggest that we will see a big breakout in eCommerce valuations in the coming 6-12 months.
M&A market moving forward: key drivers for M&A outlook
There a few key factors that are driving the M&A market right now. Some of these drivers have been around for a few years while others have come about during the past few months.
- There is a large amount of liquidity (“dry powder”) in private equity funds ($1.5-$2 Trillion) and on corporate balance sheets ($1-$2 Trillion). This is nothing new, there has been capital equity raising spree for the past few years. Though this spending spree was paused during the first part of 2020, people are starting to move from defense to offense this fall and acquisitions are picking back up.
- Until the COVID-19 uncertainty subsides, the number of attractive sectors have gotten much smaller. This, together with the first point, means you should have a large amount of capital focused on a small number of sectors.
- Interest rates are low and the Federal Reserve has been very accommodating.
- Banks are beginning to lend again (they basically shut down earlier in the year) and alternative capital sources are available.
- Liquidity in bond markets has returned and new issuances have increased. Bond markets effect M&A because most acquisitions are funded by at least some portion of debt.
eCommerce specific drivers:
- There has been a huge shift in consumer spending toward online shopping over traditional brick and mortar retail.
- Cancellation of black Friday events at most large brick and mortar retailers will push more holiday shopping online.
- Consumers built habits around purchasing online that are not expected to dramatically change after the pandemic ends.
- Large corporations in the consumer products space are scrambling to increase exposure to eCommerce in order to shore up their core businesses.
- Many traditional retailers have been or will be permanently wiped out due to the pandemic, thereby reducing the offline options for consumers.
- Growth charts and trends for eCommerce companies will promote strong valuations.
- ECommerce sales this holiday season will become the new benchmark to forecast off of and will drive a lot of valuation discussion after New Year’s.
These factors continue to drive the volume and value of M&A deals up.
It is expected that there will be a big break out where valuations skyrocket for businesses that help people do things from home, such as eCommerce, because there is still a lot of capital with few attractive markets. So far, the uncertainty around COVID-19 has caused acquirers to play defense which, in turn, keeps valuations low and has prevented this breakout from happening. This is expected to change in the coming 6-12 months as a vaccine and other methods to combat COVID-19 are created and implemented.
Though the overall M&A market went into quarantine with the rest of the world, it is making a steady recovery. Companies that help people do things at home, such as eCommerce and most digitally based companies, have seen and will continue to see valuations rise as time goes on. With an anticipated spike in valuations for digitally based companies in the coming 6-12 months, now is a good time for digital and eCommerce founders to consider M&A. To get the best valuation possible, founders should consult with experts like GWA 3-12 months ahead of their preferred exit date. This gives GWA time to review the company and help you fix any red flags, ensuring that your company get the best valuation possible. This initial exit planning assessment and consultation are free with no strings attached.
You can access GWA’s free Exit Planning Assessment through Savvi. Whether you’re a few months or a few years away from an exit, take this free assessment today to make sure you’re on track for a profitable exit.
About the speakers
Chris Shipferling offers invaluable insight to help sellers and buyers reach their full potential before and during, and after the sale of their business. Chris serves as a managing partner and the Head of Business Development for Global Wired Advisors. For the past seven years, he has focused exclusively on high-level consulting for multi-million-dollar omni channel, digitally native, and Amazon-based private label and re-seller brands.
Jason Somerville is the co-founder and managing partner at both Global Wired Advisors and Providium Group LLC. With a B.S. in Finance & International Business from Appalachian State University, Jason has 20 years of experience working in the private sector in managing roles.