What Did Global Supply Chain Disruption Mean for the M&A Market?

A noticeable impact of the deadly Covid-19 pandemic has been the disruption of overseas supply chains for U.S. products. This has led to a spike in commodities prices that have been passed on to consumers. The resulting loss of consumers’ purchasing power coincides with an unprecedented level of mergers and acquisition (M&A) activity.

Data compiled by Refinitiv show that a total of $2.4 trillion in deals were announced from January through May, an all-time record. While it’s hard to know for sure how much of this growth was the result of supply chain disruptions, they do appear to be a significant factor, according to several M&A experts I have talked to.

Experts say that Covid-19 disruption in some industries created a situation where investing in competitors became more attractive than building a business from scratch.

“What I do understand is some businesses that I have connections with have been significantly impacted with regard to the competitive cost of goods primarily because of being dependent on an overseas supply chain,” said Bill Wilkins, founder & managing partner of MSI Capital Partners, a Pennsylvania-based lower-middle market investment firm.

“So that is prompting them to look at strategic alternatives, which could include the potential divestment of the company,” he added.

Wilkins explained how the rise in logistics costs impacted many businesses’ ability to produce and sell products.

“If you were looking to be able to bring in bulk material or bulk minerals, which is our business, whereas we would potentially be able to bring in bulk landed cost with a logistical cost of 40 to 60 bucks. The logistics are near somewhere between $130 and $180,” he said.

US-China Trade War

Jeffrey Kabot, managing director of MezzCap Partners, a Los Angeles-based private equity firm, explained that it has become harder for some companies to import products from China. It all started with the US-China trade war, where both countries imposed tit-for-tat tariffs during the Donald Trump administration. Most of those tariffs remain in place today in the Joe Biden era.

“Obviously, we got hit with the tariffs,” Kabot told me. “When those got imposed, there were some price adjustments, but the flow of goods was still fine.”

“I think the challenge with China right now is more [about] shipping and logistics,” he told me, explaining how shipping from China now takes to a destination such as Florida takes months.

Greg Russell, a managing partner at West Front, said that virtually every company he has dealt with in recent months has been affected in some shape or form by the Covid-caused supply chain disruptions. [Could not find his LinkedIn]

“All kinds of issues arise from supply chain disruption,” said Russell. “It impacts your cost. It impacts timing and impacts customer satisfaction issues. So, it’s really been a very meaningful challenge, I think for all operators out there and owners it’s created financial result, volatility as you pointed out, Lou, some of that’s been positive.”

“But I would say it’s probably been more negative just because of the volatility component to it. Businesses and operators don’t necessarily like volatility. They like predictability, and so it’s that’s made it difficult,” he added.

Some materials are more challenging to import than others, according to Drew Stevens, managing director of Missouri-based Wisdom to Wealth, a financial advisory firm.

“Wood is taking anywhere between three to four months to obtain, whereas light bulbs and copper, you know, the filament for the light bulbs and even cams and trusses were building materials for roofs are all being delayed by anywhere between say six to eight weeks,” Stevens told me.

“And then you’re seeing that in places like the Wall Street Journal, that supply is not able to hit the demand because builders cannot build houses quick enough because of that lack of supply chain as an example,” he added, citing an article published recently in the Journal titled, “U.S. Housing Market Booms, but Small Contractors Miss Out.”

The article included interviews with small business owners in the construction industry who had to cancel projects because of shortages of supplies or workers.

The Impact of New Covid-19 Variants

While the world has made significant progress in containing Covid-19, there have been reports of new airborne Covid-19 variants, potentially more dangerous than the original. Some countries are already taking new measures to seclude international visitors as hotel quarantines no longer seem sufficient.

The new strains indicate that we might still have a long way to go before things for businesses and consumers fully return to normal, and M&A activity is likely to remain high for the foreseeable future, contrary to the pre-Covid-19 fears.

“We keep thinking that we’re out of it, but now you’re picking up the papers, and we’re seeing that variants now are playing a huge role,” said William Henderson, managing partner of Venture Catalyst Partners LLC.

“Some of these dislocations that are happening in the market were a result of the pandemic may still continue. So that’s something that we’re considering. We think that the demand that’s been pent up that people were expecting to be released won’t be in a position to be released. So, it’s still going to be the state of demand for goods and products,” he added.

In early 2020, Congress passed Paycheck Protection Program (PPP) to help businesses hurt by Covid-19 continue to pay their employees as they rode out the economic storm. With that gone, Wilkins with Capital Partners expects that more companies will now be forced to file for bankruptcy and liquidate their assets.

“I think you’re going to have situations where there’s going to be more companies in distress,” he said.

“Because it’s very clear to me that the PPP and other related benefits, which have been incredibly helpful to saving companies from going to the wall … but ultimately it is going to be particularly tough when you marry up liquidity in addition to increasing labor demand and competition. It really will be somewhat Darwinian relative to who survives and who doesn’t,” he added.

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