Post-Corona M&A and PE Environment and How M&A Could Help Turkey Come Out of Crisis Faster

What was the status of PE and VC pre-crisis?

Just prior to the Covit-19 pandemic, as of end of 2019, private equity and venture capital investments were highly geared towards the US and China to mostly technology, as well as to healthcare, green energy type sectors.

In Europe, 3^rd and 4^th generation family owned companies were being acquired and sold by the private equity funds pretty aggressively.

Emerging Markets, with the exception of China and some parts in Far East Asia, were not really attracting private capital. The returns were not so good as compared to US and Europe, mainly due to abrupt devaluations experienced in many and therefore investors were shying away from it.

Turkey on the other hand, in December, when we did our EMPEA Globalturk Capital Conference, were showing signs of recovery out of a serious crisis in 2018 and 2019, and even new funds were being raised.

Amongst the emerging markets, Turkey despite its many macro challenges, with its micro stories, were attracting investments and allowing for exits. This included some mega VC exits as well.

What to Expect on M&A and PE Transactions Post-Corona:

First and foremost, the transaction dynamics will change significantly. The deal origination, working on the transactions prior to and after the non-binding offers as well as due diligence and negotiating agreements will mostly have to be done online rather than physical meetings and visits. This will include first time introductions with companies and investors as well.

This new way of handling transactions is expected to continue for at least 6 to 18 months or may be more, since it will be difficult for parties to interact physically due to health concerns. This could have a lasting effect for the most part.

Therefore, we expect to see utilizing some of the existing and new technologies to interact better online such as bigger and higher resolution screens and augmented reality. Since there will be less face-to-face contact, such contacts will be handled thru better screens and more 3D Augmentation of people. Management meetings and facility visits will be pursued online thru AR enhanced technologies. We’ll see enhanced video conferencing technologies and virtual due diligence data rooms. In addition, the facilities of companies i.e. plants, land and offices may be visited and examined by drones.

M&A activity is expected to gain pace once the acute crisis period ends but we might see more local M&As than cross border initially.

Once the current acute period starts to diminish in 2-3 months as many are expecting for many countries, many companies will end up having huge financial losses. These losses could continue for years until the demand picks-up if ever. Especially the family owned companies where the elders of the family are running the companies, may feel not so motivated to deal with this dire situation and possibly would like to exit, or may be forced to exit in the first place to due financial restraints by the banks etc.

Better companies of private equity and private debt funds could possibly acquire these companies at very favorable valuations, and gain new customers and market share. This will first be local due to travel restrictions but also for strategic reasons. States may disallow cross-border M&As for various sectors where they believe it is strategic for the country and do not want foreign ownership. Nevertheless, this may get eased up over time.

I believe apart from emerging markets, Europe could become the next battle ground for cross-border M&A, old family run businesses will become more inclined to sell their businesses. Most likely buyers will be the PE firms, US and Asian multinationals.

PE deals in general, will slow down post-corona with less debt available for businesses and tighter credit markets. Asset prices will decline all over with declined sales and profitability. A very challenging exit environment is expected in the next one year at least. However, the good news is the private equity industry has $2.4 trillion of dry powder and will be in a better position to invest. Similarly, after the global crisis of 2008, private equity funds had great returns from their investments. Also, the interest rate environment not being so favorable, could trigger private investments by the private family offices. But this capital is expected to be deployed more slowly and carefully than before.

Investing in Diversity and Essentials will be the new themes:

What also would trigger M&A would be the reconsideration of the supply chains for many multinationals. Diversity in supply chain manufacturing will be the theme. Onshoring and Nearshoring aspects are expected to become dominant.

Turkey is expected to attract the interest of foreign direct investors due to being a strong production hub, with full flexibility, entrepreneurial spirit, and being export oriented with an advantage of its proximity to Europe.

Private capital chasing deals in China and Asia, unlike the current thinking, may slow down due to the political factors and diminishing prestige and trustworthiness of China perceived by many. Therefore, funds may pour money into diversification themes for other countries. Same as multinationals manufacturing or producing in that region.

Essentials will be the theme for years to come, where non-essential luxury spending is expected to go down. We’ll see many luxury brands disappearing or significantly seeing low revenues.

Technology companies who provide solutions to new way of conducting business and adaptation to new life styles would attract high investor appetite.

Vertical-specific software platforms are on the verge of a megatrend driving productivity and automation in companies.

Remote working from home cabins may be on demand.

For many barbers, hair dressers, shops, extra hygiene cabins may be made and sanitized. Extra disposable uniforms/clothing may be needed.

More casual-ware with wearables like techno-shirts and T-shirts would be on demand.

Pharma and healthcare products and services as well as biotech will be new growth areas.

Many businesses will struggle:

Restaurant Business will change dramatically with new hygiene and safety protocols: You may be screened for fever for example prior to going in. The seating could be 1.5 to 2m apart. All the table cloths and tableware may largely become sanitized and disposable.

Travel and hotel business, like the restaurant business will face with new hygiene and safety restrictions and protocols and therefore get a hard hit. At the same time there will be hardly anyone travelling for business purposes like before for many months to come.

Commercial real estate could get severely hit due to more companies adopting remote working policies. Many of them may be turned into residences or healthcare facilities.

Turkish and Emerging Markets Companies need to be more ready than before for an M&A:

Companies need to be not physically but virtually-ready for an M&A now than ever before. They have to allow investors to access their information, meet with investors, visit your site, all virtually rather than physically. This will require more preparation than before.

It won’t be easy to cluster emerging markets any more since they will look very different than each other. Their strength will be based on how well each one gets out of this crisis. There will be a diverse situation for the emerging markets.

Can M&A help Turkey come out of this crisis faster?

Not all companies can be rescued by the Government. But if we leave them to Government, most of them will shut-down, leaving employees jobless, banks not get paid their loans, and Government losing tax income. Therefore, it is strongly suggested to the Government to be ready NOW, for the post-crisis period. What can be done?

• Companies could immediately be incentivized to buy or merge with other companies in Turkey. This is a perfect timing for sectorial consolidation.
• Banking law should allow banks to write off debt, or sell their debt at a competing process to institutional debt buyers. Bankruptcy codes should be revised to allow for this as well.
• Many companies will be in trouble but bigger companies can be in a better situation to act fast.
• Should allow banks to provide non-recourse “Acquisition Finance” (or thru KGF) immediately based on the future cashflows of the target.
• Bring an insurance for the acquisition (i.e. if fails, will insure at a certain risk premium)
• Provide a corporate tax shelter for the amount of investment, meaning, do not take corporate tax until the tax amount equals to the investment amount.
• Allow for employees to buy the company via a leveraged buy-out and allow for credit.
• Provide incentives for advisory work to bring their companies to a preparedness level to be acquired/invested or to acquire others.
• Also allow for non-recourse “project finance”.
• Reduce corporate income tax and withholding tax to 10% levels. Also take out the burden from the employer on social security tax. This will allow for unregistered economy to become registered and help bring FDI into the country at record speeds via M&A.
• This will also reduce M&A preparation work.
• Incentivize companies for better reporting, based on their business lines and business line-based profitability.
• It should be ensured that savings in domestic private pension funds invest in private equity funds, so that domestic fund management companies can be active in providing capital and transferring these resources to companies.

Many companies in Europe may change ownership:

Many family businesses in Europe may change ownership for similar reasons. Private Equity Funds and decent companies, especially from Asia, will want to buy companies in this region. For strong Turkish companies, this will give an opportunity to buy companies at very affordable valuations. There is great benefit in evaluating this situation well and acting fast. In this regard, it is important for the Government to motivate the business community.