2020 started with high volumes of mergers and acquisitions in Europe, broadly in line with 2019’s figures. However, the arrival of the COVID-19 virus has had a significant impact on the M&A market.
Mergers and acquisitions, like many other global sectors, rely on the interconnectedness of financial systems to function. So, what happens when international markets slow down and people self-isolate? In this instalment of our ‘3 Point Perspective’ series, Pier Luigi Colizzi, Head of M&A – EME, considers how the M&A market was performing before the COVID-19 crisis, how it is responding now, and what the outlook might be for a post-COVID-19 world.
M&A activity in Europe at the start of 2020 was not dissimilar to the same period in 2019. The market was strong, with transactions fuelled by high equity prices and buoyant financing conditions. Even in the face of ongoing macroeconomic challenges and geopolitical concerns, corporate boards had the confidence to pursue large transactions, and sponsor activity was robust at close to 20% of total deal value.*
With the spread of the COVID-19 virus, equity and high-yield markets have witnessed large swings, creating uncertainty in valuations. Moreover, with the potential of a recession looming, debt financing has become more challenging. Nevertheless, we have seen the announcement of several major transactions that were already underway pre-crisis, including companies disposing of non-core assets.
In the immediate term, we expect a slowdown in M&A activity as companies focus on shoring up liquidity, cost efficiencies and, when needed, raising equity. The adoption of remote working practices will also slow down the regulatory activity in EMEA and the US, including merger clearance, prolonging the time from announcement of a transaction to closing.
In the event of a prolonged crisis, we can expect to see transactions taking place based on three drivers:
Well-capitalised strategic and financial buyers, including activist hedge funds, using this opportunity to build sizeable positions in targets and / or attempt takeovers of undervalued companies.
Corporates selling or spinning off non-core assets to address liquity, leverage and valuation issues.
Large investors contributing capital in exchange for significant equity stakes in businesses in need of a recapitalisation or with liquidity constraints.
Once the COVID-19 crisis ends, we anticipate traditional merger activity to resume on the back of rising share prices, increasing confidence, and improved financing conditions.
In the early stages of stabilisation we expect the re-emergence of leveraged buyouts, because of increased access to financing and the significant amount of equity capital raised by financial sponsors in recent years, further boosting what has historically been a healthy private equity market with announced M&A volumes globally growing from $500bn in 2013 to $800bn in 2019.*
We also expect to see early consolidation in hard-hit sectors, where leading companies in the industry will acquire laggards, exploiting synergies and achieving scale to consolidate their leadership.
Finally, we expect a renewed use of equity as form of consideration for transactions among corporates, prior to moving back to debt financing, a trend we witnessed during the financial crisis in 2008-2009.
Source: Eikon/Thomson Reuters