Corporate Finance Accomplishments and 2020 Industry Trends

While in the past healthcare has proved to be recession resistant, the financial and operational disruption caused by COVID-19 has proved that healthcare is not pandemic resistant. The outbreak in the U.S. beginning in late February caused significant turmoil for healthcare providers. As a result, most healthcare M&A processes that launched or were preparing to launch in the first half of the year have been put on hold. Companies that have weathered the crisis with sufficient liquidity are considering the feasibility of restarting sale processes in the second half of the year or in 2021. Those with near-term liquidity needs have been exploring various strategies to raise capital, such as sale of minority stakes. Those with severe liquidity issues are seeking relief via debt restructuring or, in some cases, liquidation.

One of the few bright spots emerging from the crisis has been the widespread adoption of telemedicine by patients, providers and payors. Medical specialties with a high proportion of CPT codes reimbursable through telemedicine have been able to generate revenue from remote consultations while specialties with fewer telemedicine eligible codes have been restricted to reimbursement only from emergency procedures. Capitated, risk-bearing providers have also fared well, at least for the time being. Some non-essential medical specialties that were closed may snap back as physicians treat a backlog of procedures that cannot and should not be deferred. However, these practices may also find themselves facing working capital challenges due to lengthy revenue cycles.

Once the economic recovery takes hold and lenders are back to financing acquisitions it seems likely that consolidation activity in healthcare will resume. Many of the smaller, independent physician practices that survive the downturn may become more receptive to selling to larger, better capitalized practices, allowing the them to practice medicine without the headaches of dealing with creditors, meeting payroll, staffing, billing and collecting receivables.

Changes that may come from the crisis, in addition to the adoption of telemedicine, include making permanent the recent waivers of in-state licensing requirements that allows providers to cross state lines to alleviate regional shortages. Greater price transparency could also emerge if the federal government conditions increases disclosure of insurance carrier contract terms on providing additional financial aid to the hospital sector.

Finally, while the impact of the crisis on the November elections is unclear, if the crisis tilts the political balance of power to the Democratic Party, legislation to expand ACA coverage, if not to promote even more progressive policies such as the Public Option and Medicare for All, can be expected.

Through early March 2020, consumer sector transaction activity remained strong. As we approached mid-March 2020, we observed a slowdown in activity due to the COVID-19 crisis and resulting economic uncertainties in the capital markets. As we move into June, buyers remain extremely cautious due to the uncertain economic environment; however, we are starting to witness positive signs of the market opening back up in select consumer sub-segments. Several categories within the consumer sector have performed extremely well year to date (YTD), and this performance has allowed potential strategic buyers and financial investors with modest confidence to revisit the transaction marketplace. In addition, the middle-market financing environment has stabilized, providing a further foundation for transaction activity.

Most notably, the direct-to-consumer products and services, food retail, consumer staples, home furnishings, recreational products categories have outperformed YTD; these are the most notable sub-segments where we anticipate a resurgence of healthy company transaction activity. The multi-unit retail, consumer service, restaurant and hospitality categories generally remain challenged and prone to substantial restructuring activity, although the government stimulus and economic reopening has improved performance for many of these sub-category participants.

We would anticipate the transaction marketplace to continue to strengthen through the balance of the year, as economic visibility becomes clearer and operating performance begins to return to normalized levels. We are seeing considerable pent up demand among financial investors and select strategic acquirers and a significant backlog of assets that were being prepared for market in Q1 and were put on hold due to COVID-19. We anticipate this volume to enter the market in June and Q3, 2020. In addition to corporate activity and private equity backed activity, we also anticipate closely held business owners will seek to monetize their businesses during calendar 2020. Many of the key underlying drivers of transaction activity remain intact, although a number of fundamental changes may impact market reception and business valuations moving forward. Companies will continue to seek to enhance business scale and diversity, as well as improve operating leverage with suppliers and consumer distribution channel partners. These dynamics will likely offset persistent trade tensions and incumbent operating cost pressures that we anticipate to continue through the balance of 2020.

General industrial transactions have encountered significant headwinds in the first half of 2020, centered around COVID-19 related shutdowns. The continued uncertainties related to the corresponding economic fallout, general societal unrest and global trade tensions are expected to hamper M&A markets throughout the remainder of 2020. Across the industrial landscape, certain sectors which have been more meaningfully impacted by the economic shutdowns (e.g., automotive and commercial aerospace) and will likely remain at lower output levels for the foreseeable future. Credit markets for new debt issuances have tightened significantly and borrowing costs have increased as lenders reprice credit due to higher perceived risk. Healthy corporate balance sheets, to a certain degree, have helped strategic buyers weather these headwinds and others are seeking to strengthen competitive positions, solidify supply chains, and look at new channels for product or service offering expansion. Industrial M&A activity is anticipated to remain at lower levels, compared to the past several years, throughout the remainder of 2020 with a gradual uptick in activity as the year progresses and the economy begins to reopen.