On Wednesday, June 24, Bass, Berry & Sims continued its COVID-19 M&A Environment: Dealmaker Perspectives Webinar series with leading professionals in the government contracts services industry. The panelists included Bass, Berry & Sims members Jason Northcutt and Todd Overman, who were joined by Craig Reed, Chief Growth Officer and Senior Vice President at Serco; Kate Troendle, Director at KippsDeSanto & Company; and Eric Wolking, Operating Partner at Bluestone Investment Partners. A recording of the webinar can be found here.
The panelists’ discussion focused on market considerations for deal professionals in the new and evolving era of COVID-19. Some of the key takeaways from this installment are listed below.
- Market Improvement Observations. As with other sectors, the government contracts services industry experienced a slowdown in deal flow as participants assessed the uncertainty surrounding the pandemic and endured the chilling effects of the implementation of quarantine procedures. However, the government contracts services industry was impacted less severely than other industries as smaller, quality transactions continued to close over the past few months. Notably, the indexed share price performance for government services continued to trade above the S&P 500 and recently rebounded to near-record highs achieved in February.
- Lender Interest in Government Contracts Sector. Panelists reported a recent increase in interest from lenders in the government contract services space on account of increased deposit bases creating additional capacity for debt transactions. As a result, new firms expressed recent interest in entering the sector and other firms plan to continue to be active and build upon their past success.
- M&A Market Strategy. Panelists observed that market participants capitalized on the dearth in M&A activity to improve their prepositioning and marketing positions for when the market improves. Market participants refined their strategy foundations for target identification and banker outreach to build relationships and ensure that their interests are understood by potential targets.
- PPP Loan Considerations. Panelists shared an expectation for a period of increased diligence scrutiny on companies’ receipt of assistance such as PPP loans. Companies are encouraged to view PPP loans as a new type of small business set aside contract due to the different certification standards that the companies were subject to in the application process. Whether companies needed the funds received significant attention as well as regulatory guidance on who was actually “small,” who qualified and the applicant’s affiliates. From an eligibility standpoint, affiliation analysis should be a priority if a target company received a PPP loan.
- Reps & Warranties Insurance Trends. At the beginning of the pandemic, insurers attempted to broadly carve out all losses related to or resulting from the pandemic. This was problematic for both buyers and sellers as almost any loss can arguably be related to the pandemic. Lately, some insurers have softened this exclusion to focus on the failure to protect individuals from the transmission of COVID-19. However, current policies have not removed the exclusion altogether. Additionally, pricing on policies has incrementally increased over the past few months but insurers are now more willing to insure smaller deals on account of the slower deal flow.
- Deal Negotiations in the Current Environment. Panelists discussed the increased complexity in negotiating and drafting purchase agreements in the current environment. It was highlighted that there are challenges to treating potentially forgivable PPP loans in traditional debt-free, cash-free transactions. It was noted that material adverse change provisions are not the best mechanism to get out of a deal due to their rare implementation except in extraordinary circumstances. Instead, buyers should focus on specific covenants or closing conditions. Additionally, deals with an interim period between buying and closing typically rely on pre-closing covenants to govern the operation of the business in the “ordinary course.” In the pandemic environment, there has been an increased focus on what the “ordinary course” means. Parties are specifying certain activities that do or do not fall within the ordinary course as well as defining the term in purchase agreements.
We welcome the opportunity to discuss any of these takeaways with you or other topics of interest. Should you have any questions, or suggestions for future topics, please feel free to reach out to one of our speakers.