COVID-19 Has Significantly Lowered the Value of M&A Activity

As of this writing, the world has reported more than 2.5 million cases of coronavirus and 177,613 deaths. In the United States, the numbers continue to climb with 818,000 cases and more than 45,000 deaths.

In addition to all of that, the financial impact is almost too great to determine.

One thing that can be measured is the impact of COVID-19 on M&A activity. Analysis from Dealogic found that the value of M&A activity in the first quarter was significantly lower than the last quarter of 2019, down 35% globally and 39% in the United States. Only $618 billion worth of deals have been completed year-to-date in 2020, in contrast to the $956 billion in M&A by this time last year, according to the data.

The research also notes that the value of worldwide M&A activity fell 25% from 2019. It totaled only $730.5 billion in Q1 2020, according to data from Refinitiv. But the COVID-19 decline is even worse in the United States with a 50% year-over-year decrease in overall M&A value, and deal-making for U.S. targets totaled just $256 billion during the last quarter—a five-year low, according to Refinitiv.

Refinitiv also reported that for deals worth more than $10 billion, Q1 2020 was the worst first quarter for M&A activity since 2017. The value of all deals greater than $10 billion totaled just $194 billion in the first three months of 2020, a 53% decrease compared to 2019. Typically, large M&A deals require a number of face-to-face meetings, which usually happens over a long period of time.

Deals in Progress Now on Pause Because of COVID-19

As so much of the world is closed down because of the coronavirus, global mergers and acquisitions have also been put on hold. Acquiring companies have been left to abandon takeover deals as they try to stay in business.

For example, after roughly six months of tense and escalating discussions, Xerox dropped its $35 billion bid of its rival HP. Xerox said that because of the current global health crisis related to the COVID-19 coronavirus, it would instead concentrate on its own operations.

“The current global health crisis and resulting macroeconomic and market turmoil caused by COVID-19 have created an environment that is not conducive to Xerox continuing to pursue an acquisition of HP Inc,” Xerox said in a statement on March 31st.

Before the COVID-19 pandemic broke in the U.S., Xerox led a hostile takeover bid of HP in February to combine the two legendary tech titans. HP continually rejected Xerox’s proposals when Xerox raised its offer to $24 per share. That boost would have valued HP at roughly $34 billion. But since that time, the coronavirus outbreak spread around the globe and created economic uncertainty. These developments made Xerox discontinue its plans for the deal. (Of the two, HP is the larger company and is more highly valued than Xerox).

Lack of Financing Cooling Deal Activity

Along with the economies of many of the nations around the world, the M&A pipeline is slowing. A significant reason for the pipeline slowdown is a lack of debt financing because of COVID-19. This along with drastic stock market swings and limited in-person meetings for business negotiations, create a difficult environment in which to close new deals.

Only four of the top 10 worldwide deals announced during Q1 were in the United States. That statistic brings the U.S.’s overall portion of global deal-making to just 35%, which is a sharp decline from 52% in 2019 and the lowest level since 2012.

Analysts think that with the ongoing COVID-19 outbreak continuing to put the stock markets through the ringer, the global turmoil will create some opportunities for insightful investors and companies with cash on hand. They believe that most of the M&A activity may be in the form of rescue deals and restructurings, with companies trying to address the negative economic impacts of the pandemic.

However, private equity firms, hedge funds, and other big investors that are cash-laden are reportedly eyeing companies in the travel, lodging, and entertainment sectors that have been severely disrupted by the COVID-19 outbreak, according to the Wall Street Journal.

Surprisingly, while the number of U.S. deals plummeted, European M&As doubled in value, totaling $237.1 billion in Q1, Refinitiv reported. That result is in large part to a few big deals, including the $30 billion Aon and Willis Towers Watson merger that closed weeks before the coronavirus started to trouble the continent’s economies.