M&As will continue declining as companies find other ways to raise capital: Dechert's Thierfelder

Good morning, Brian. It's a pleasure to see you. As you noted in your intro, like so much else in the economy today, deal-making and the global M&A market has been severely impacted by the pandemic and the corresponding lockdown that's followed it. From the past six or seven years, all your viewers know we've been in virtually a bull market for global M&A and deal-making generally. And the first quarter of 2020 started to see a significant slowdown in global M&A and also in U.S. M&A as the economy faced headwinds, trade wars, other issues, restrictions on foreign direct investment. And then the impact of the pandemic, the lockdown spread, M&A collapsed in April. April was the single worst month for M&A on record in the past seven years. And not only did new transactions stall, but there's been a market increase in litigations where buyers had already signed up for existing deals pre-pandemic have been trying to litigate to step away from those deals that they signed up on.

Look, Brian, great question. Right now we're at a very anomalous situation where the capital markets are very liquid, public valuations are quite high, yet deal-making activity remains somewhat stagnant. Certainly companies, as you all know from being on the show every day, have been hunkered down trying to raise cash to shore up their balance sheets. Companies are pulling out all the stops to raise cash regardless of the cost. Leaving aside certain sectors like healthcare, tech, and consumer staples, they're facing unprecedented drops in revenue. M&A is unlikely to be a solution in the very short term for those companies. Even for those that are raising cash due to the high public market valuations, the potential large-cap sellers have not yet capitulated on value to reflect the new normal. It's going to be reflected in revenue, particularly as I expect you start to see second-quarter earnings reported. Only companies right now that are in need of rescuing — think poorly capitalized companies, think family-backed companies, think certain sectors of the middle market — are signaling that they're willing to be acquired. At the same time, potential buyers in the large-cap market can't rely on one of the traditional levers they use to drive M&A, which is synergies. Right now synergies can't be harvested fast enough to make up for the decrease in revenue that people are seeing, including at targets they're looking at. So I think right now in the immediate short term you're unlikely to see that cash war that's getting raised be used to affect M&A in the large-cap space. We will see distressed M&A. You will see some people opportunistically looking to consolidate the market, but I don't think you're going to see a wave of large-cap M&A yet.

Look, great question. And by the way, on the leveraged buyout market, starting to hear even within the last 12 to 18 hours, rumors about bankers trying to unlock liquidity to finance the leveraged buyout market. Somewhat late-breaking news, but bankers are trying to figure out ways to extend capital so that you can reignite the leveraged buyout market. Going back to your question about what can highly leveraged companies do right now — obviously, what people have been very focused on: raise capital as quickly as you can and put as much capital on your balance sheet as you can, whatever the source and whatever the cost. Manage your operating expenses and really try to stem any kind of bleed. I think going beyond that, one of the things that I talk to CEOs and investors about regularly is, in an environment like this, trying to use operational leverage. You may not be in a really prolific period of economic success, but if you're standing stronger than some of your competitors in the market, you may be able to use that as leverage in negotiating with either people that you have costs running out to or even with your customers to try to recut better deals if you happen to be even slightly stronger than some of the peers you compete with. At the same time, you could be looking at repurchasing debt in the market if your debt's trading below par — there may be significant opportunities to deal on a price basis that's quite advantageous. You obviously need to pay attention to your debt instruments. You may have to look at restructuring your credit. And then I think we're going to see a huge wave coming up in the fourth quarter to the first quarter as companies that are highly levered realize they cannot grow their way out of the situation because revenues are coming in and remaining lower than they were in 2019. I think you're going to see a large wave of asset and divisional sales.