Mergers and Acquisitions (M&A) reflect the current developments in the world economy and market trends. Unfortunately, we are witnesses to a global phenomenon that affects the economy and markets – the coronavirus pandemic.
The novel coronavirus is having and will continue to affect the economy and markets, thus directly affecting M&A. Today, we are going to explore COVID-19’s impact on M&A in great detail.
The COVID-19 impact is profound, and one of those massive-scale ones. If we take a closer look at it, it becomes clear that, in a short time, all of the following happened:
The economic crises that took place in the past 30 years, including the burst of the dot-com bubble in 2000 and the Great Recession in 2007, had one thing in common. Buyers delayed or even canceled their acquisition plans. We can safely assume that the same scenario will follow the coronavirus pandemic.
However, the pandemic will also change both activities and deals in the M&A world. With most employees advised to work remotely, the entire environment changes. All players in the M&A world are affected, including:
A few days ago, we received news that there was no merger and acquisition deal worth more than $1 billion announced during the last week. The last time the same news hit us was back in 2004.
Merger activity worldwide is not stagnant. For the first time in the last decade, it went down significantly. Compared to the previous year, this year, M&A activity is down by 33%. The activities’ value so far is estimated at $762.6 billion. This is the lowest year-to-date amount since 2013. Overall, the deal activity went down by 20% year-on-year.
Companies are now cashing in assets and pulling back from investments to make it through the crisis. The announced transactions are not guaranteed, as well.
As we could see, Canada’s Alimentation Couche-Tard Inc pulled out from the acquisition deal. Alimentation Couche-Tard Inc was about to buy the petrol station operator Caltex Australia Ltd. The value of the deal was about 5.6 billion. But the fuel demand plunged, and the Canadian company decided to get out of the agreement. Xerox’s deal with HP worth $34 billion doesn’t seem to work out anymore as well.
Some of the deals that survive the coronavirus pandemic are expected to have their timelines changed. The majority of M&A deal timelines will extend. The pandemic affects all M&A stages ranging from preliminary discussions to the negotiation of a definitive acquisition or merger agreement.
All stages will take significantly longer due to social distancing and the variety of other measures imposed by governments worldwide. We also have to factor in that some government bodies are working at low capacity as well, causing delays in paperwork and approvals. For instance, the Department of Justice asked companies involved in M&A to add an additional month to their deal timeline. At the same time, the competition-regulatory bodies of the EU have stopped working altogether.
As you probably already know, M&A processes encompass dozens of tasks. Each one of them is important to both parties in a deal. The pandemic is going to change the procedures in this landscape, especially letters of intent and due diligence process.
It is safe to assume that both buyers and sellers won’t enter the negotiation or even letter of intent until assessing how the current situation affects the companies in the M&A deals.
The buyers will, most likely, have to extend their due diligence efforts to assess the seller’s business with the focus on how the Covid-19 pandemic changed business. This includes all assets, resources, processes, and income.
The buyers will enter the letter of intent negotiation phase with more bargaining leverage due to the imminent risks related to the pandemic. The practice will further extend the M&A timelines and bring down the value of the deals in the M&A.
In the private sector, most companies turn to third-party debt financing options to see M&A processes through. However, the pandemic has affected financial institutions as well. The availability and terms of debt financing will become uncertain, making financing of M&A deals significantly harder.
There are a lot of questions hanging in the air regarding third-party debt financing. We will have to wait to see how the buyers, sellers, and lenders will adjust to the new developments.
During the past two world economic crises, we could see one trend. When it came to M&A dealmaking, the leverage shifted away from sellers’ to the buyers’ favor. We should expect to see the same thing happening again.
Strategic and private equity buyers are not immune to the effects the pandemic has on the financial aspect of any business. But, they still have access to significant resources, and they can wait on the best possible M&A deal. The sellers, especially those in verticals heavily hit by the pandemic, such as hospitality and travel, will be in an unfavorable position and will not be able to prevail in negotiation terms in M&A deals.
The M&A landscape is very sensitive to even the most subtle changes in the economy. The coronavirus pandemic has a considerable impact on the world’s economy, and M&A, as such, will undoubtedly change. We can already see some trends, such as decreasing deal activity and deals being called off.
It appears that uncertainty is the main factor making sellers and buyers change their strategies, which calls for dependable M&A consulting services now more than ever.