Global M&A activity dropped to its lowest point in over a decade in the second quarter of this year, according to data provider Refinitiv. Companies retreated from their growth and expansion plans to concentrate on protecting their operations and employees in the midst of the coronavirus pandemic.
As reported widely, many CEOs were reluctant to seek out blockbuster deals that would transform their companies without more confidence in the financial outlook. Analysts say that instead, they capitalized on favorable financing conditions to raise capital by selling stock and borrowing at lower rates to drive equity and debt issuance to record highs.
“It was the quarter for capital market activity. Companies are making sure their balance sheets are strong and durable for what comes next,” Michael Carr, global M&A co-head at Goldman Sachs Group Inc. told Reuters.
The report noted that global M&A totaled $485.3 billion in Q2 2020. That’s a drop of 55% from 2019 and the lowest since the third quarter of 2009, according to Refinitiv. These numbers were based on more that 8,200 transactions. That’s the lowest quarterly number since Q3 of 2004. Observers say that the decline was driven primarily by the United States, where M&A sank 85% from year-earlier levels to $94.3 billion in the middle of the coronavirus pandemic. This marked the first time since the third quarter of 2009 that U.S. has failed to take the spot in the rankings.
Europe and Asia saw more moderate declines of less than 10%, to $182 billion and $150 billion, respectively. Dealmakers comments that the economic uncertainty brought about by the COVID-19 pandemic had reduced the ability of many companies to begin and successfully complete M&A negotiations.
“The main challenge to get deals done is that buyers have to be prepared to pay a full price while the current business performance is still well below pre-COVID-19 level,” said JPMorgan Chase & Co global co-head of M&A Dirk Albersmeier remarked in an interview with Reuters.
The biggest deals of Q2 were in Europe, the Middle East and Africa. For example, Liberty Global and Telefonica agreed in May to merge their British businesses, Virgin Media and O2, in a $38 billion deal that will create a giant in mobile and broadband. Also, National Commercial Bank, Saudi Arabia’s largest bank, said recently that it would acquire the smaller lender Samba Financial Group for up to $15.6 billion.
Observers says that many of the transactions that are now alive are between parties that already knew each other or were in negotiations prior to the pandemic.
European food-ordering firm Just Eat Takeaway.com NV agreed in June to acquire its U.S. peer Grubhub Inc in a $7.3 billion all-stock deal. This is one of only a number of cross-border deals completed in the quarter.
However, as some deals were announced, others that had been signed but were not yet completed, faded.
In June, Simon Property Group Inc, the largest mall operator in America, announced that it was halting its $3.6 billion deal to buy Taubman Centers Inc. the reason given was poor performance in the retail sector during the coronavirus outbreak. (Nonetheless, the shareholders of Taubman Centers overwhelmingly voted to approve and adopt the company’s merger agreement with Simon Property Group, despite its efforts to stop the proposed deal.).
And private equity firm Sycamore Partners ended its $525 million deal to acquire lingerie brand Victoria’s Secret from L Brands Inc in May. Also, the Japanese tech conglomerate SoftBank Group Corp halted its agreement to fund a $3 billion tender offer for additional shares in co-working company WeWork.
Some observers say they’re seeing a gradual pick-up in M&A activity as some players adapt to a post-coronavirus environment.
“Right now we are seeing significant pick-up in client dialogue, just in the past three to four weeks,” said Goldman Sachs global M&A co-head Dusty Philip.
“Many of our clients are starting to think big and outside of the box, asking themselves what has changed and how do I adjust my strategic priorities to reflect the pandemic we have all been living through.”
Companies and their advisers are also getting used to the idea of carry on negotiations and due diligence online.
“Nearly all of the management presentations and expert sessions – from a diligence standpoint – are being done by video conference. That is true for most board meetings. We are also seeing companies employ drones and (camera crews) filming in place of site visits for due diligence,” said Bank of America head of global M&A Patrick Ramsey.
There are more than a few companies that are fighting to regain their footing, but some have leveraged the advances in technological innovation and are ready to emerge from the pandemic downturn stronger and eager to pursue acquisitions.