By Aron Adamski, BSc Economics @LSE
OVERVIEW OF THE IMPACT OF COVID ON THE M&A LANDSCAPE
The coronavirus crisis is having and will continue to have a huge global impact on mergers and acquisitions. So far, the impact on the M&A landscape has been significant, unfortunately in a negative sense.
- M&A deals above $10B are down by 60% from the same period in 2019
- Global dealmaking dropped to its lowest levels in more than a decade in Q2 2020
- $485B worth of deals were struck since April (50% down from 2019)
- US fall in activity was the sharpest and collapsed 90% (to $75B) from 2019
“For most of the last few months, although things were extremely busy, the emergence of new deals of substantial size had essentially ground to a halt” ~Eric Schiele, Kirkland & Ellis
REASONS FOR THE COLLAPSE IN M&A VOLUMES
- Halt to many acquisitions
- Renegotiation of transactions at a lower price
- Companies request stricter covenants when striking new deals
HALT TO ACQUISITIONS
Dealmakers who had agreed transactions before the pandemic have started to give it second-thoughts. 44 US deals were cancelled since April (almost 3x the cancellations in Q1 2020). In many cases firms are triggering “material adverse change” clauses that allow them to pull out of a deal agreement without the usual penalties.
- Boeign has abandoned a $4B deal to acquire 80% of Embrarer’s commercial jet business
- Xerox dropped its $34B offer for HP
- SoftBank has terminated its $3B tender offer for WeWork shares
Some industries have been disproportionately affected by the pandemic, such as travel, leisure, transportation, oil and gas. This lead to more deal cancellations in those sectors. However, these industries may see a rise in the M&A volumes in 2021 as transactions involving rescue deals, restructurings and distressed selling will likely increase.
RENEGOTIATION OF TRANSACTIONS AT LOWER PRICES
Some companies are trying to renegotiate transactions at a lower price, as many valuations have declined as result of the pandemic. This is because the level of future cash flows or even existence of some companies is in question and hence the valuations need to incorporate the pandemic-related risk. For example, LVMH has been looking for ways to renegotiate the $16.5B acquisition of Tiffany and Co.
COMPANIES REQUEST STRICTER COVENANTS
In M&A, covenants protect the purchaser’s interests prior to completion of a transaction. For example, there may be leverage covenants, interest and cashflow covers. All of these covenants rely on the operational performance of a company, such as EBITDA. As expected, with the coronavirus outbreak and the uncertainty it causes, stricter financial covenants are likely inevitable as investors try to hedge their bets. Consequently, breaches of financial covenants are likely inevitable and more deals are likely to either be delayed or abandoned altogether.
“The same thing has happened in the past. There was new language post-9/11 and post-2008. Every time you have companies try to walk away from a deal, new language gets added to contracts.” ~Anu Aiyengar, JPMorgan Chase
SOME M&A TRANSACTIONS DIDN’T SLOW DOWN
As in every crisis, there are winners and losers. The former are probably PE groups and large corporations who went on a shopping spree during the pandemic.
PRIVATE EQUITY GROUPS AS THE MOST ACTIVE DEALMAKERS
PE accounted for 16% of the global buyout volumes in the first half of 2020 (highest level since 2007). For a detailed analysis of the PE-led buyouts I recommend you to read the article below:
CONSOLIDATION OF CERTAIN INDUSTRIES
Many big corporations, just like the PE groups, went on a shopping spree in pursue of strategic transactions. Many of these transactions are characterized by capital-rich corporations acquiring smaller, capital-hungry competitors for discounted prices in order to consolidate their target markets:
- Just Eat Takeaway acquired Grubhub for $7.3B (we covered it here)
- Amazon acquired self-driving start-up Zoox for $1.2B (we covered it here)
- Uber is set to acquire food delivery start-up Postmates
MY VIEW OF THE POST-COVID M&A FUTURE
- Industries worst-hit by the pandemic may see a rise in the M&A volumes in 2020/21 as transactions involving rescue deals, restructurings and distressed selling will likely increase
- In the EU the telecoms sector will likely see a rise in transactions after EU’s competition chief urged companies to pursue cross-border transactions to fend off non-EU acquisitions
- More strategic acquisitions by large corporates are likely to come as the pandemic causes the valuations of smaller competitors to plummet, creating an opportunity to buy cheap
- There may be a wave of mergers among pharmaceuticals and biotechnology companies once the pandemic calms down
- Protracted low interest rates may lead to an increase of leveraged buyouts (LBOs) by the largest PE groups
- Digital transformation will likely accelerate and consolidation of e-commerce, distance learning, online media and telecommunications industry will likely accompany this trend
- Number of transactions in the health and wellness industry will increase as awareness and demand for healthy life, good nutrition and quality medical care increases
- There will be an increased investment in sustainable projects as climate change was highlighted by the pandemic
“M&A will return when companies and boards have both confidence and clarity on what the future will hold.” ~Peter Weinberg, Perella Weinberg Partners
