Introduction
In line with the rest of the world, Covid-19 brought the M&A industry to a standstill with a tremendous slowdown in dealmaking. After years of historic highs, driven by cheap cash and investors’ appetite for highly strategic deals, Covid-19 crisis just paralyzed the entire industry. The outbreak triggered the most intense volatility in equity markets (83%, at Lehman Brothers’ alike levels) since the global financial crisis, forcing governments and central banks to make unconventional moves to create a sense of certainty.
This report aims at understanding the implications this crisis will have over M&A market, analyzing the industry by sector and providing an overall outlook for the next future.
M&A industry 2020 Q1 data show a 16% decrease in volume (on 2019 Q1 figures), but the major impact will emerge in Q2. In fact, Covid-19 crisis is likely to have its major effects over initial, early stage deal that have now been stopped all around the world. Such effect is likely to emerge strongly in Q2 and Q3 data and last for several months. On top of the physical obstacles on the day to day job, the pandemic created huge uncertainty over valuation and earnings forecast. Without reliable financial projections, investors seem to opt for a Wait and See strategy to have a better clue of the situation. On the one hand, listed companies face shareholders pressure to keep liquidity rather than use it for M&A deals; on the other one, PE funds are waiting to have a better clue over valuations and perspectives.
Current Situation
Until last week of February, financial markets seemed to be careless towards COVID-19. Many market participants thought that the virus wasn’t going to be so widespread around the world but now the real situation is very different with millions of positive cases and thousands of deaths. Companies are focused on keeping their employees and businesses safe in this difficult period. Managers are being asked to make strategic decisions about their strategies in M&A sector. The trade-off is between two choices:
– Acting like the pandemic doesn’t affect the plans and completing the strategies pushing the deals through
– Keeping a prudent attitude by postponing deals to be closed in this period.
It is very complex to understand which of the two is the correct path to follow. The factors that need to be analyzed are countless and the statistics that refer to past time seem to be not enough to clarify the scenarios of an uncertain future
If we go back to the 19th of February 2020, indexes such as S&P 500 and STOXX Europe 600 were performing at record highs. Since then, when the pandemic hit Europe and the US with thousands of positives, in just a few weeks- time, returns were negative by a 30% and volatility peaked at 83% on the VIX index, at a level never reached in twelve years-time. Many economists and analysts predict a deep recession for the second half of 2020 at least.
Starting from such a compromised environment, valuations and listings for companies considered ready for an IPO or an acquisition are almost impossible to be made in a professional way, which takes into account a farsighted look towards the future. M&A industry is now in stand-by for most of the corporations. Historically, as we can see in the next chart from BCG, M&A activity has a correlation of about 80% with stock indexes.
The trend in deals was already slightly downwarding even though the volumes remained the same due to some megadeals, but now it is expected to go down very fast in the short period at least.
It is sadly confirmed by the deals which have been delayed in March, regarding industries such as cinemas in the Cineworld-Cineplex deal where the damages of this pandemic can be seriously compromising as shown by the falling share prices of the two corporations, but more in general all companies feel threatened and concerned about the operation financing and the possibility to respect business plans.
As soon as the pandemic will be over, solid companies have their opportunity to plan their future expansion.
Research demonstrates that declining valuations are the perfect occasion to complete operations able to create long-term value for dealmakers and their shareholders. Furthermore, while other companies are busy to survive and avoiding losses, a corporation can position its new business to perform better than the industry average once the crisis is over.
Some advice on the acquisitions during market bear periods appear to be an acquisition in a non-core activity, that are connected with a relative total shareholders return of 8.5% against a core activity deal which delivers a 4.6% over a one-year period. Issues can be seen also by the due diligence point of view, which is going to be more concentrated on some key aspects, such as force majeure clauses in contracts, the readiness of liquidity situation to withstand risks and the security of the supply chain. Experts indicate that operating in the M&A sector is actually very risky while markets are uncertain and downwarding so the benefits can be pursued only by those who are frequent and experienced dealmakers in this industry.
Bocconi Students M&A Circle 
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