Why industrial M&A froze in the 2020 lockdown, from a turnaround buyer

• Sweeney-Cordova says industrial M&A was in a general freeze in spring 2020, partly because lockdowns made on-site due diligence, plant visits and management meetings impossible.
• Banks kept preparing teasers, information memoranda, pitch books and now videos of manufacturing plants while live processes slowed dramatically.
• She names pharmaceuticals, medical equipment, defence parts, food and beverage sold to grocery stores, and corrugated cartons as resilient sectors.
• Automotive, truck, rail, motorcycles, Boeing suppliers, oil and gas suppliers and restaurant suppliers were the hardest hit, because their end customers had shut down.
• Her restructuring questions centre on cash: the burn rate, staying a going concern, hibernating the company, and support from banks and government.
• AIAC was still buying turnarounds, stopped companies it calls resurrections, and temporarily stopped companies it calls hibernations.

In spring 2020, industrial M&A stopped for a reason that had little to do with price: buyers could not get into the plants. Siobhan Sweeney-Cordova, executive vice president and head of global M&A at American Industrial Acquisition Corporation (AIAC), says M&A was experiencing a general freeze. Deals were deferred or aborted because the company's outlook had deteriorated or was uncertain, or simply because on-site due diligence was impossible under lockdown. People could not drive or fly to inspect manufacturing plants and meet management teams (around 3:16). Preparation carried on, with banks putting together teasers, information memoranda, pitch books and now videos of manufacturing plants. The actual process, she says, had decelerated dramatically.

“M&A is experiencing a general freeze so transactions are being deferred or aborted because in many cases the company's outlook has deteriorated or is uncertain or simply because it's impossible to perform on-site due diligence because of the lockdown nationwide.”

Siobhan Sweeney-Cordova, executive vice president and head of global M&A, American Industrial Acquisition Corporation

The 12-minute interview, recorded in May 2020, is part of Datasite's Navigating the Storm series, and the host is Datasite's senior director of product marketing. Sweeney-Cordova starts with how industrials reacted. The response could have been faster, she says: the virus was in the media from January and no one really paid attention. Then automakers such as General Motors, Ford and Fiat retooled plants to build ventilators. Volkswagen's Spanish unit outside Barcelona converted a car line to make respirators in a record week, going through 13 prototypes to reach the final model (around 1:06).

“The questions are gonna be what's the burn rate, cash, cash, cash. How much cash is required to continue to own the company?”

Siobhan Sweeney-Cordova, executive vice president and head of global M&A, American Industrial Acquisition Corporation

Her sector calls are blunt. Pharmaceuticals and medical equipment are a good space. If you make defence-related parts you're fine, and food and beverage companies selling to supermarkets and grocery stores are doing really well. So are makers of corrugated cardboard cartons, she says, because Amazon ships in them every day (around 4:25). The hardest hit were automotive, truck, rail, motorcycles and anything Boeing related: anything where the end customer is shut down. Suppliers to oil and gas were struggling because the low oil price was crippling those companies, and suppliers to restaurants because restaurants were mostly closed.

“How can I hibernate the company so that the company still exists even though all the employees are at home?”

Siobhan Sweeney-Cordova, executive vice president and head of global M&A, American Industrial Acquisition Corporation

For a company facing restructuring, her list of strategic questions starts and ends with cash. What is the burn rate, how much cash does it take to keep owning the company, and how does it stay a going concern? How can it hibernate, so that the company still exists even though all the employees are at home, and how can it get support from its banks and the government (around 7:39)? Asked about the pros and cons of restructuring, she says there are no cons. Restructuring has to be a constant activity, and a company that is not at least thinking about it is, in her words, resigning itself to a stagnant company that's going nowhere.

“There are no cons for restructuring. Restructuring needs to be constant, it has to be a constant activity.”

Siobhan Sweeney-Cordova, executive vice president and head of global M&A, American Industrial Acquisition Corporation

She had not seen divestiture or restructuring activity pick up, and did not expect it until there was light at the end of the tunnel: a slowdown in Covid-19 cases and daily deaths in the US and Europe. AIAC kept buying anyway. Sweeney-Cordova says the firm was buying turnarounds, and also what it calls resurrections, companies that have stopped, and hibernations, companies that have temporarily stopped (around 10:55). Her practical advice comes from one of AIAC's operating partners, a mentor of hers: this too will pass.

When buyers cannot visit a site, the data room and the material around it have to stand in for the plant tour. Sellers in asset-heavy sectors can prepare plant videos and management access early, so a stalled process can restart quickly.

0:03 hello everyone my name is Brandon malleus and I'm senior director of product marketing here at Davis Knight we'd like to thank you in advance for attending our industrials leadership series featuring Siobhan Sweeney prodota executive vice president and head of global M&A at American industrial acquisition Corporation as we all know the global crisis has had a devastating impact on industries and businesses worldwide no two industries or regions are like they're all experienced that impacts the crisis in different ways as a result businesses will need to tailor their financing your restructuring strategies to fit their unique industry and regional challenges as part of our latest data sight thought leadership series navigating the storm we're conducting a series of short interviews with industry experts to help deal makers think through the storms ahead and get some practical advice on how to start preparing their businesses and clients for the restructuring way that's about it with that I'd like to introduce you chip on to talk about the industrial sector siobhan obviously industrials is in the eye of the storm when it comes to the current global crisis with disruptions supply chains plants closing down concerns about the men there's a

1:06 lot of uncertainty out there from your perspective how has the industrial sector responded to the recent market events volatility could have been faster Korona was in the media since January but in Europe until the end of January but no one really paid attention to it so automakers like General Motors Ford and fat have retooled plans to build a ventilators GM parted our ploy the company called Blendtec which is a ventilator specialist to accelerate production by using the carmaker's plant in Indiana say the Spanish unit of Volkswagen outside of Barcelona located in Spain is manufacturing a respirator assisted with motor and adapted by the windshield wipers so the whole line where they manufacture one of their car brands called the Leone which is Spanish for Lyon was converted to produce these

2:09 respirators and in one week record they were able to do this new installation and each respirator has about more than 80 electronic components and mechanics and it passes through an exhaustive quality control you know ultraviolet ray sterilization and from what I hear you know I did it they didn't like a total of 13 prototypes in just one week in order to get the final model so you know thanks for the team of 150 employees of different parts of the company their motivation is to manufacture a piece of equipment that's gonna save lives yeah that's really interesting how certain companies are learning to adapt in this environment and pretty impressive at the speed which they're moving what sort of challenges you foresee in the short term for má má is experiencing a general freeze so transactions are being deferred or

3:16 aborted because in many cases the company's outlook has deteriorated or is uncertain or simply because it's impossible to perform on-site due diligence because of the lockdown nationwide so people are operating from their homes and they can't drive or fly to inspect different companies manufacturing plants and to meet management teams so in many cases there's preparation taking place where investment banking firms are putting together teasers and information memoranda pitch books and now videos of manufacturing plants but the actual process of actions has decelerated dramatically hmm that makes sense and within industrials I guess are there certain sub sectors that you would expect to be the most resilient coming out of this time yes Pharmaceuticals is

4:25 a good space medical equipment is a good space if you're making defense-related parts or equipment or products you're fine you're doing well if you're in the food and beverage business you're doing well because people are still getting and drinking right but if you're selling to supermarkets and grocery stores then you're doing really well if you're involved in manufacturing of corrugated cartons or paper or corrugated cartons which are cardboard cartons you're doing very well you know there are very few companies that are better positioned than Amazon to flourish in this crisis so as customers are increasingly relying on deliveries from the everything store as we're currently in the age of government

5:30 lockdowns so the answer is why this corrugated card is so resilient is because this premium company called Amazon is shipping with these cardboard cartons every day yeah and a lot of us are getting them too and so within industrials I guess which some sectors do you think will be the hardest hit and then why have to say automotive truck rail motorcycles and anything Boeing lated yeah yeah anything where the end customer is shut down so I mean all of the companies that serve om so original equipment manufacturers that have shut down such as Boeing and most of the automotive manufacturers as well as a lot of oil and gas exploration and development companies so if you're

6:34 serving the automotive sector or the truck sector or their motors sico sector or the rail sector you're not doing well if you're serving yeah if you're serving the oil and gas sector you're not doing well why because the price of oil is very very low and it's crippling oil and gas companies right now and if you service restaurants with food and beverages then you're not doing well because restaurants are primarily closed unless they're still open for a delivery only basis yeah and so with that said have you seen any divestiture a restructuring activity pickup could have if you haven't already I guess when do you guess that will happen no we haven't seen it you know we've seen it decelerate but we've seated slow down and I don't

7:39 think it'll pick up until there's a light into the town meaning a slowdown in Kovach 19 cases and new daily deaths in the US and Europe gotcha in the event that companies do need to think about restructuring you know what sort of strategic questions should they be asking themselves the questions are gonna be what's the burn rate cash cash cash you know how much cash is required to continue to own the company how can I produce my cash and still maintain the company as a going concern how can I hibernate the company so that the company still exists even though all the

8:44 employees are at home how can I obtain support from our banks and from the governor to do this you know those are the key issues gotcha and are there any pros and cons that come to mind in terms of if a company does need to go through a restructuring cycle you know what they might want to be thinking about there are no cons for restructuring you know restructuring needs to be constant you know it has to be a constant activity if you're not restructuring or at least thinking about restructuring that you're effectively resigning yourself to a stagnant company that's going nowhere you know then you're not improving your company so restructuring means improvement there are no cons to restructuring you must improve period yeah that's it makes sense

9:49 and so move forward any sort of practical advice for the industrial sector as we kind of continue to be within you know this difficult market environment and yeah as we kind of recede into the next few weeks and months sure as one of our operational partners and mentor at the AIC group once said to me this too will pass if you need to get something done there are companies out there that are ready willing and able to help you you know turnaround managers that are excited skilled and capable of protecting and defending your company and if you need money or you need management there are companies available that can help and

10:55 we're one of them you know we continue to look for deals and continue to buy companies even and this environment you know we're currently buying turnarounds and we're also buying what's called resurrections meaning companies that have stopped we're also buying hibernations these are companies that have temporarily stopped we were in the market every day looking for such opportunities great well it seems like you're still very active so that's very positive well yeah sure thank you in advance for your participation today it's great to hear you know from leaders like yourself in the space especially as we continue through these in certain times so yeah so thank you and thank all for listening have a great day