The M&A business and the Corona pandemic

The corona crisis is keeping the whole world in suspense. The M&A business does not remain unscathed. As the situation represents a unique challenge for companies, the forecasts of different analysts vary. This article aims to provide an objective view on the near future of M&A activities. In order to achieve this goal, various half-yearly reports of renowned companies in the M&A industry, numerous press articles and several financial blogs were analysed. The article contains a summary of the different forecasts of all examined resources. This is to ensure that the readers do not have to rely on one opinion, but on a variety of views. In the opinion of StettlerPartners, this is the only reliable way to adequately prepare for the future development of the M&A business in these times of uncertainty and to create corresponding opportunities for action.

Status Quo

As the first half of 2020 drew to a close, the full impact of COVID-19 on the global economy began to emerge. The disruptive impact of the shock, unprecedented in both scale and scope, is reflected in the M&A deal activity, particularly in the second quarter of 2020. According to Mergermarket’s recently published Global & Regional M&A Report, global transaction volumes declined by 32% (6,938 versus 10,155 transactions) compared to the first half of 2019, while transaction values fell by a staggering 52.7% (USD 901.6 bn versus USD 1.9tn) – an environment reminiscent of the aftermath of the 2008 financial crisis.

In the Swiss market the Corona crisis is also negatively affecting the M&A business. In the first half of 2020, the number of transactions dropped by around 28 percent compared to the previous year. The transaction volume fell to 27.7 billion in the first half of 2020. This represents a drastic contrast to the first half of 2019, when the transaction volume amounted to a 87.2 billion.

The main reason for the decline in transaction volume is the great uncertainty in the market. Especially in the second quarter, many deals were postponed or completely suspended as investors became more and more cautious. On the one hand, many potential buyers are busy dealing with internal problems, while on the other hand the earnings potential of takeover and merger targets has become unclear due to the special and unpredictable situation. Furthermore, the handling of international transaction negotiations suffers from travel restrictions.

Cross-border transaction activities have decreased by 57 percent in the first half of 2020 compared to the previous year.

„The main reason for the decrease in transactions is the uncertainty in the marked caused by the Corona pandemic.“

Nevertheless, some major deals were completed in the first half of the year, although the very large acquisitions and mergers in the double-digit billion range failed to materialise. Two transactions in particular stand out. The sale of BP’s petrochemicals division to a Swiss subsidiary of INEOS for USD 5 billion, and the purchase of 81 percent of the shares in the Portuguese transport infrastructure company Brisa-Auto Estradas de Portugal SA by Swiss Life Asset Managers, the Dutch APG Group and the South Korean National Pension Service (NPS) for almost USD 4.5 billion. Financial investors acted as buyer or seller in around 40 percent of the deals. The reason why the activities of financial investors did not decline to the same extent as transaction activity on the entrepreneurial side is the slightly lower valuations and high investment pressure. 

Some sectors are less affected by the pandemic. In the technology, media and telecommunications sector, a more robust development with above-average M&A activity is emerging. Around one fifth of the transactions in the first half of 2020 were in the TMT sector.

Is an M&A upturn in sight?

Despite the negative developments in the first half of 2020, an upturn in the M&A market is forecast from various quarters. It is expected that the number of transactions as well as the volume will increase again slightly in the second half of the year, provided that the corona crisis does not worsen further and cause additional uncertainties. A recent analysis by PwC Switzerland goes even further and forecasts an upcoming wave of M&A activity.

„It is projected that the number of transactions as well as the volumes will slightly increase in the second half of 2020.”

In a typical M&A cycle, transaction volumes and values initially decline in the wake of an economic downturn. But this time it is different. The reason is that the weaker economy results in low company valuations. As a result, management and boards of directors are less reluctant to make large investments and consider expanding their organisations in a weaker economy. When companies, private equity firms and other investors revalue their portfolios and strategies, opportunities for buying or selling grow. With a larger supply, M&A activity accelerates. Finally, this momentum slows as more companies regain confidence and economic fundamentals and valuations rise again, reducing the number of acquisitions targets and the prospects for high returns.

The CEO of the Japanese bank Mizuhe, Tatsufumi Sakai, believes that companies should not wait for a post-corona period, but should adapt to the new coronavirus-driven conditions. He justifies this statement by saying that the pandemic and its consequences for the economy will drag on for years. In the short term, the pandemic will cause many liquidity bottlenecks, which in turn will lead to frequent M&A deals.  In order to restore liquidity, individual parts of companies will be sold. PEs will play a crucial role in this process.

„The lower valuation or liquidity bottlenecks triggered by the Corona pandemic will boost partial purchases or sales of companies.“

GlobalCapital underlines the idea of recovery with the input that European companies should shift their focus from the problem of the corona pandemic to possible opportunities created by the crisis. Currently many companies can be acquired at a lower market price than half a year ago. This is especially true for industries that have been hit hard by the corona crisis, such as the travel, tourism or oil and gas industries. These lower prices offer opportunities for strategy-oriented buyers, but also come with increased risk.

All in all, the Corona crisis had a negative effect on the global and Swiss M&A business. Nevertheless, various forecasts predict an upswing for the second half of 2020. However, these forecasts should be treated with caution. The future development of the global crisis and its impact on the M&A market is and remains elusive and can therefore only be predicted vaguely.