How Global M&A Activity shaped up in Q1 2020 amid COVID-19 outbreak

How Global M&A Activity shaped up in Q1 2020 amid COVID-19 outbreak

Let us look at how the Global M&A activity shaped up in Q1 2020 amid the COVID-19 outbreak. Through the record-breaking bull run in global transactions that started more than six years ago, it has, at times, appeared like the M&A market had grown impassive to external collapses.

Notwithstanding the mounting economic and geopolitical difficulties of recent years, investors have lived very sanguinely, and markets, with some unavoidable peaks and troughs, have lingered at or near to historic highs.

The subject of when this long cycle would finish had annoyed at the wisdom of market spectators. It had started to seem like virtually nothing could sway the spirits of investors who, buoyed by solid fundamentals, were usually resolute in carrying out large, highly strategic transactions.

While all cycles do ultimately cease, few suspected that it would be one catastrophic disaster that would eventually pull the market to an abrupt standstill. Still, the incipience of the coronavirus (COVID-19) pandemic has effected just that – at least in the short-term.

As increasing numbers of countries go into “lockdown” to check the expanse of the COVID-19, it is no hyperbole to assert that the COVID-19 pandemic has, in merely a few weeks, transformed the world, and will possibly have a much longer-lasting effect.

Steering trouble

Its consequence is perceived most certainly in our everyday personal and working lives and in the drudgeries of companies over most sectors now grappling, at best, to sail this time of unpredicted misfortune and, at worst, battling for their very survival.

This COVID-19 outbreak has also aggravated the most extraordinary volatility in equity markets since the Global Financial Crisis (GFC), with investors composed in the initial days by unprecedented interventions from governments and central banks to produce a feeling of confidence in a time of intense financial uncertainty.

In this situation, I anticipate the global M&A markets to go into setback after their most expansive ever period of continued growth, with the probability that activity will remain minimum-till it is explicit the pandemic has crossed its peak. Some sense of real social balance gets revived. Data from 20 March 2020 already registered a decline of 18% in value and a 16% decrease in volume from Q1 2019. Though, these figures do not indicate the complete impact that the pandemic will have on M&A activity.

First shock

The disaster has had an instant bearing on deal activity, and over the global network, we have observed that consequence accompanies a usual pattern.

As the pandemic has grown, transactions at an advanced stage have usually proceeded as dealmakers rush to get them over the line. I have witnessed some investors accelerate through deals at a rising rate. There is a rapid, pronounced spike in clients requesting if they can get out of agreements started into, whether the crisis ranks as a material adverse change (MAC) or Force Majeure event, or if pre-completion covenants can get confronted. Even in the U.S., where MAC clauses are prevalent than in most jurisdictions, buyers have limited legal scope to get out of agreements, given that all other stipulations get satisfied.

Volatility hurts investor faith

Extreme volatility hits investor trust, and caution and utmost discretion are the terms that define the spirit of buyers and sellers in most markets right now.

For example, bidders are seeking to buy time and continue processes to get a sounder understanding of where things are going. Sellers, although keen at first to obtain deals on higher terms, are viewing their valuation hypotheses disputed and are frequently also taking the opinion that it might be more beneficial to wait it out.

By far, the most climactic force has been on deals that are under primary consideration or in their initial stages. Activity here has stalled very clearly, with the bulk of such arrangements being either discarded or put on hold endlessly. That has left the short-term pipeline of transactions swiftly going very dry for the first time in several years.

Logistics and valuations

Two determinants are at action here: logistics and the constant challenge of valuing assets in this hysterical climate. Deal processes traditionally have required significant levels of human interplay, and that continues to be the situation even though we observe automation, AI, and data analytics point frequently in transactions, especially during the arduous business of performing due diligence. 

The pandemic has also caused it very tough to place a value on assets. The buyers are not able to appraise, with any confidence, what bearing it will have on their projected earnings, and, without substantial financial projections, it is not very easy to price a deal.

Unique tactics

Yet if the buyer has an agreement of the intrinsic value of a target business, additional factors may be at action and serve as an impediment. Stockholders of public companies – agonized about how prolonged the crisis will continue and how profoundly it will hurt earnings – will be inserting pressure on boards to preserve cash rather than splatter out on M&A. Even PE funds, independent of such shareholder stress but regularly under higher pressure to spend their accumulated dry powder, will want to pause until they have a more beneficial viewpoint on valuations.

I notice some novel tactics used. In a shocking move, Xerox has, for instance, publically retracted its hostile USD34bn bid for HP, explaining that it wants to safeguard the health and wellbeing of employees and members through the COVID-19 outbreak.

Innovative deal strategies

Beside regular M&A activity, we could observe boards contemplating recapitalization projects, joint ventures, selling off non-core assets, consolidation movements to deliver much-needed cost efficiencies, and aims to do deals that assist companies in re-engineering supply chains.

One conspicuous lesson from the financial crisis is that, in the initial days, companies may have to concentrate on deals that improve their liquidity. To do so, they may well get pushed to sell good, high-value assets that, in healthier times, they would possibly have fancied to retain.

Nevertheless, once the transaction market does start to recover, buyers and sellers could discover themselves confronting a familiar problem that was obvious before the crisis happened. Their relative price expectations remain fiercely out of line, which could, in turn, drive to litigation over management decisions as people look to derive value.

What rests forward

Throughout this unpredictable and challenging time, the most prominent pressing priority is to take extraordinary action to battle the pandemic and shield public health.

The material shock and disturbance that has knocked global markets – owing to the sudden action taken to lock down parts of the economy to guard against virus spread and an even greater crisis – will undoubtedly trigger a painful global economic slowdown in the periods ahead.

The accelerated and exceptional way the global economy has abruptly ground to a standstill along with the controversial fiscal policies executed by governments and central banks as stimulus packages may delay the hope of a relatively speedy return to growth once the virus has been restrained and is sharply in retreat. When that time approaches, what might be the state of things to come in the M&A markets?

I think there are genuine reasons to be confident that the transactions market will recover, and quite vigorously. The world has evolved, but change can often be a significant spur to reform. However, before the crisis gets in check and confidence gets revived, prophesying the timing, the scale, and the state of that revival remains a topic of speculation.