In the past week, Bloomberg reports that there have been more deals to fall through than had been announced. This grave statistic—capped by Xerox ending its hostile $35 billion bid for HP—gives a good taste of the spare M&A opportunities during the coronavirus. The new normal is now companies facing uncertain futures and sudden cash bites that have begun to tamp down any aggressive plans for expansion.
Experts say that the companies fortunate enough to see their way to the end of the pandemic may discover a very different landscape than the one they expected at the start of the year.
A 10-year boom in mergers and acquisitions, highlighted by some of the biggest deals in history, jammed on the brakes last month as the pandemic sent stock markets into a state of shock and locked up debt markets tight.
Rather than dwelling on the negativity of the drop in M&A opportunities, which is down more than 33% this year to the lowest level since 2014, dealmakers are trying to put on a brave face and focus on the most resilient sectors that might be available after the pandemic is over. Bloomberg surveyed bankers and asked them the industries that might be the first to see renewed activity, which strategic deals still make sense, and whether private equity firms will open their checkbooks and grab deals.
Observers say that these opportunities may not develop for some time, and they may be sparse when they do appear. The S&P 500 fell 18% this year to date, and a drop in U.S. employment figures has already shown the longer-term extent of the pandemic’s toll on world economies. Because of these questions, deals already agreed-upon are being scratched on a daily basis. For example, American aerospace suppliers Woodward Inc. and Hexcel Corp. announced recently that they’ve dropped their plans to merge.
All the same, one investment banker at Goldman Sachs is getting prepared because he believes that event-driven bear markets usually rebound to provide M&A opportunities. Let’s look at some possible areas of focus:
Health-Care Deals. The urgent need for treatments and a Covid-19 vaccine has focused many potential buyers on the health-care industry. Pharmaceutical titans have been joining forces with small biotechnology firms to develop experimental therapies for the virus. Although many of these companies are working currently on maintaining drug supplies to stretched health-care systems, the pandemic may present a number of potential M&A opportunities.
All-Stock Transactions. With equity prices dropping, stock deals—which let a target company’s investors share in the benefits if the market recovers later, and don’t require funding—may become more compelling.
Stable Sectors. When the economy stabilizes after the coronavirus pandemic, the first rush of deals could involve companies seeking to remedy supply chain problems or get their operations back on track. M&A opportunities that are motivated by strategic need will come first, said one investment banker. He anticipates intra-industry consolidation and vertical integration to secure and support supply chains.
Defense Strategies. Advisers are spending their days reassuring nervous clients across various industries more than actually getting deals done, Bloomberg says. These client calls typically focus on information-gathering or liquidity needs, but investment bankers are also looking at the companies that could use their advisory services when the pandemic is over. Defending against opportunistic bidders and keeping activist investors at bay weighs on many CEOs minds, especially as lower valuations make buying into a stock more affordable. While some activists have given their targets additional time, others have moved forward with M&A opportunities as share prices fall.
Raising Debt and Private Equity. Some large debt deals have also raised expectations that deep-pocketed buyers could seek target companies that currently have lower valuations. Private equity firms are busy managing struggling portfolio companies; nonetheless, they still have $2 trillion that could be used for acquisitions when valuations stabilize. Some of the hardest-hit industries, such as energy, hospitality, and transportation, may be the biggest bargains.
Many potential buyers may decide to wait out the pandemic before making any big moves, holding onto much-needed cash and working at keeping their own businesses afloat. But watch for some aggressive bidders trying to find a bargain as the COVID-19 crisis subsides.