September 12, 2022 | Blog
Will Chuchawat heads up the Private Equity and M&A Group at the international corporate law firm Proskauer Rose LLP. Representing companies in deals across a huge range of industries, he has won acclaim from Legal500, Super Lawyers, and The M&A Advisor, among others.
Following the release Datasite’s report, As the Tide Turns, What’s Next? H2 Market Outlook, we asked Will to share his views on the trends we identified. Here he gives his unique perspective as one of the lawyers who help make M&A happen.
Q: What’s your view of what’s happening in the M&A market? The Pitchbook data implies a cool-down, but Datasite still sees plenty of activity in the mid-market and in private equity.
A: I think the market is trying to find itself. We’ve all talked ourselves into a recession. When you have these periods of uncertainty, you still have folks looking at deals, but they may not act on them, because they don’t know where the market is going to take them. Nobody wants to be the person that did a deal at the peak of the market. When the market’s going up, it’s easier.
Q: How are your clients on the private equity side handling this, since they can’t just stop making deals?
A: You can’t necessarily think about deals just in terms of this upcoming year. Folks are trying to reconcile the short-term value issues and potential turbulence in the market with the overall profile and expected returns of an investment.
Deal activity often slows down in the summertime. September will be a better indicator – whether we get the same flood of deals after Labor Day. I think people can see that there are still really good deals out there. You just have to price them correctly and make sure that you’re underwriting to your overall investment timeline.
Q: How is inflation affecting valuations and deal flows? Are you seeing multiples come down?
A: They’re coming down, though not so much as the buy side might want! There’s a mismatch in expectations, which can stall potential deals. You can’t peg valuations to the peak of 2021.
So there’s a lot of wait-and-see on the buy side – even if you have plenty of capital. You tell your LPs, ‘Look, we’re seeing plenty of deals, but we think they’re overpriced.’ I expect to see more attempts to bridge valuation gaps with earnouts. You can say, ‘If you’re so sure of what this business is going to do, put your money where your mouth is.’
Folks are also challenging assumptions in terms of what EBITDA and earnings look like. Some people think inflation is going to fall, so your earnings will get larger. Others say inflation is going to continue, so you have to build in more costs and reduce profit forecasts.
Either side could be correct. But that uncertainty is what’s causing this friction in getting deals done. With inflation the big unknown, it’s hard to price a deal correctly.
Q: Last year due diligence times dropped by 20-30%. Now they’re up by about a week on average. Is this another effect of uncertainty?
A: Part of it is. People need to make sure they’re comfortable with the fundamentals. But also there was an urgency last year, so the sell side had a lot of leverage to compress deal timelines. Now there’s not so much competition.
Q: Are people now spending more time developing their pipelines? What are the best practices for identifying targets or buyers?
A: I’m not sure if most people are doing that, but I think it’s vital. In times of stress, people neglect the pipeline. But you have to replenish it after you complete deals, in a structured way, tracking conversations, and keeping consistent with it.
A lot of it is about communicating with the various deal players, whether that’s investment bankers, accounting firms, or law firms. And some firms have better business development arms. Private equity, in particular, could improve in that area.
Private firms should make sure they’re on the shortlists of the investment banks. They’re the gatekeepers. And that comes down to maintaining relationships – talking to people.
Q: What about for add-ons? We’re seeing those trending up among PE firms – where are they finding them?
A: Working the network is part of it, whether that’s investment bankers or operating partners. Once they have a platform, the management team typically knows who the competitors are and will help to identify acquisition targets.
Q: Many companies have bandwidth issues thanks to the Great Resignation and the 2021 rush. How has your firm adapted?
A: Many folks stopped hiring during COVID, thinking the world was going over a cliff. And then the boom came, and we had a war for talent.
People have learned from that. Now they know we have to staff for such eventualities, and not be caught scrambling. You don’t want to have to turn away work.
Q: For many, the number one impact of that experience was incorporating technology more. They’re trying to optimize use of their time. What role does technology play for you day to day?
A: If you find a way to clone me, please let me know! Seriously, I do welcome more technology. Particularly in the area of workflow processes. You want everyone to see what you’re seeing, and to catch the key issues. It also helps communication with clients because they understand where you’re at in the deal process.
The question really is one of adoption. The legal industry has never been one to embrace technology in a hurry!
Q: Do you see any sectors taking off? For example, our data highlights real estate.
A: Actually, I’m mostly seeing sectors losing steam. Technology is one, but also consumer discretionary. It’s that recession mindset, and the shadow of rising interest rates.
But the real estate finding doesn’t surprise me. That seems to be a typical reaction to rising interest rates and inflation. As for other industries, no – I’m not seeing any heating up.
Q: Is there anything else you can address in terms of best practices?
A: For us, it’s mainly preparation. If you do the work up front, you have less deal friction later on. Too many people want to have the hard conversations later. I would do the very opposite.
What’s a ‘hard’ problem? It depends on the particular company and industry. Often it’s things like working capital, potential liabilities, or areas of heightened scrutiny. For example, in healthcare there’s regulatory risk. Tax issues are also worth addressing up front.
Q: You mentioned earlier that you’re very process-focused. That doesn’t sound like something you learned in law school.
A: You’re right – law school is definitely not process-driven! But whenever I do a deal, there’s a cadence to it: ‘After we sign this, then we do this, and did we send out the typical email for this?’ It makes sure people are focused on the right thing.
I tell my team to keep moving the ball forward. And to be communicating constantly with the client. We need to know what’s happening on their end, and vice versa. Otherwise there’s an attitude of, ‘I don’t know what the lawyers actually do, they just sort of make this paper happen.’ Similarly, lawyers and bankers don’t think much about what the other does – too often people think, ‘Stay in your lane!’ But to me, M&A is a team sport.
Thank you, Will. Those are some fascinating insights into the current M&A climate.
For more analysis and context, read As the Tide Turns, What’s Next? H2 Market Outlook report, produced in association with Pitchbook.
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