M&A Activities & Opportunities Out of Covid-19 Pandemic

Mergers and Acquisitions are the strategical approaches that are being adopted by companies, with an ultimate aim to grow and expand. Companies put in a lot of effort and time to make a deal happen. But, given the chaos created by coronavirus crisis, global mergers and acquisitions have plummeted, and lately, have become stagnant. 

Impact on M&A Activity

The dealmakers began this year by kickstarting a multitude of deals and with a positive outlook expecting increased synergistic activity. But “that is now starting to change” says Cornelia Andersson, head of M&A and Capital Raising for Refinitiv.

As per Refinitiv’s data, it was the worst first quarter for M&A since 2016, showing the overall number of deals declined 13% from a year ago and hit a six-year low.

Jurisdictions Wise M&A Activity Trends

Talking about jurisdiction, M&A activity has taken a toll in each case, as can be seen in the following graph.

US & APAC is apparent

Insights: The decline in the case of US & APAC is apparent, but the unusual skew in the case of Europe is just because of a handful of mega-deals settled just weeks before the virus started battering the continent’s economies.

What are the reasons for this plunge and delay in M&A activity?

Diversion in Focus

    • The executives of companies, instead of focusing on strategic buying/acquisition deals, are diverting their focus and energy towards the health of their own companies.
    • Private equity investors prefer spending their time and efforts to strengthen their existing portfolio companies, rather than holding a new deal.
    • The large parts of the world are shut down amid this pandemic; so, companies are being forced to abandon takeover deals as they struggle with staying afloat and paying workers.

Lack of In-person Meetings

    • Most of the M&A deals are typically the result of a series of face-to-face meetings, often over a significant period of time. But, due to the lockdown and halt in movement, companies’ officials are not able to do so.
    • The overused adage of “getting everyone in the room” for negotiating terms for agreeing to a deal is not currently possible.

Procedural Delays

    • There are delays in taking third-party consents such as landlords, customers, and intellectual property licensors.
    • Physical site diligence has already become challenging, as a consequence of the imposed travel restrictions. For example, some of the labor-intensive sectors such as power, energy, iron and steel, and chemicals require detailed environmental assessments, which have been delayed.
    • There are delays in obtaining the necessary antitrust or other regulatory approvals. For example, the Department of Justice has asked firms involved in mergers and acquisitions to add 30 days to their deal timing agreements. Similarly, the European competition regulators have also suspended investigations on a number of proposed deals.
    • Buyers requiring financing are facing delays because of the unsettled state of debt markets and available liquidity. The M&A lenders may seek closing conditions that are even more stringent than those sought by buyers, which ultimately increases the closing risk for both buyers and sellers.

 Fear About The Economic Projection

    • There may be a fear about where economy would be heading, because of which acquirers have to put plans on hold. Hence, currently, it’s uncertain for them to decide which industry to invest in.

How can M&A opportunities be created out of this pandemic?

According to one analysis done during the 2001-02 recession, acquisitions completed during and right after the recession generated almost triple the excess returns of acquisitions made otherwise. In short, recessions offer rare opportunities for companies to improve their competitive position through acquisitions, mergers, and partnerships. So, instead of just watching & waiting for this pandemic to get over, dealmakers should utilize this time in the best way so as to find out the most resilient opportunities that might be waiting on the other side of the pandemic.

As per Ros L’Esperance, global co-head of banking at UBS, “M&A activity has slowed down as clients are trying to assess where the market is moving, the impact on individual sectors and businesses, and are waiting for valuations to stabilize, but dialogues remain robust,”. He added, “Certainly there will be delay inactivity but once things reset they will probably bounce back and accelerate much faster than it did after the financial crisis in certain sectors.”

These M&A can be made in the same domain or cross-domain. Not to mention, such deals require proper strategy behind them. Let’s have a look upon the opportunities, which can be grabbed in the form of mergers & acquisitions:

    • One hack to go for an M&A deal is to assess where the world is heading. One of the most being researched sectors is this time of crisis is health-care. And, it has its spotlight focused on researching treatments and vaccine for Covid-19. So, it’s a great opportunity to team up with health-care players, to lure businesses into impoverished areas. For example, Johnson & Johnson and the U.S. government have partnered to work on an inoculation. 
    • SMEs and start-ups, if not deep-pocketed, can also ask for help from big players, in case they have a good solution offering or idea in mind. For example, if a start-up is having a breakthrough idea, but not the finance to execute it, they can collaborate with financially stable players to get aid. For example, tiny biotechnology firms have already started teaming up with pharmaceutical giants to develop experimental therapies for the virus. 
    • Since due to the lockdown, people are advised to spur and practice social distancing by staying at their homes. And to keep themselves busy and entertained, people are relying upon online streaming services, online gaming, social media platforms, video conferencing, etc. This results in the exponential growth of these sectors. However, there is a tough competition among these players, and grabbing a good M&A deal timely, which enhances their product portfolio, will absolutely help them to have an edge over their competitors.
    • The most affected sectors in these times are travel and leisure, transportation, and oil and gas, because of the heavy drop in consumer demand. However, M&A activity related to these sectors may tick upward in 2020, as buyers will see opportunities for bargains in these sectors. It means, well-capitalized companies and private-equity groups can use the opportunity to grab up companies left vulnerable by the crisis, at much lesser prices.
    • Similarly, due to halted operations, companies that are not financially stable may go bankrupt. So, in order to survive, many companies will require aid, file for bankruptcy, or may become targets for acquisitions or mergers.

For example, in a report by McKinsey and fashion-trade publication Business of Fashion, it has been estimated that 34% of publicly traded fashion companies in Europe and North America were showing signs of financial distress before the pandemic, that could possibly go above 80% because of store closure for two or three months.

    • Tech companies are evergreen. In almost every area, technology companies are ones that complement any type of service. Even in these tough times, they have been considered as a boon; such as the Internet of Things is keeping the world connected, Robotics and Artificial Intelligence are proving their utility to eradicate the human intervention by sanitizing areas, delivering medicines/groceries and many more. Similarly, cloud services will see a rise in demand due to an increase in work from home (WFH) culture. So, joining hands with tech companies will absolutely lead to a brighter future.
    • Start-ups are the organizations having the best of the talent and offered solutions. During these times, if a start-up is being hit badly, it might be an end to their fresh journey. So, mergers and acquisitions in the start-up space include benefits for both the seller and the acquirer. For example, the acquirer gets great talent, developed technology, and a ready-made customer base. And, the seller gets the monetary benefit, and attention to look after their technology and customer base.

According to Citigroup Inc.’s head of EMEA M&A, Alison Harding-Jones, who also is the vice-chairman of banking, capital markets, and advisory, “Transactions are driven by strategic need will come first,”; “we expect intra-industry consolidation as well as vertical integration to secure and support supply chains.”

As discussed above, once this pandemic is over, it is expected that M&A activity would regain the surge. Therefore, it is a crucial time for companies to strategize their moves to scrutinize & grab the perfect opportunity fit for their business. But, above all aforementioned factors, it is suggested one should not rush and should not use deals to reshape the company’s competitive foundation, but instead, to strengthen it.

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