Off the ropes: M&A rebounds after pandemic slowdown

January 2021  |  FEATURE  |  MERGERS & ACQUISITIONS

Financier Worldwide Magazine

January 2021 Issue

Although widely expected to fall off a cliff in 2020 when the full extent of the coronavirus (COVID-19) pandemic became clear, global M&A activity did, in fact, do nothing of the kind. Instead it rebounded, following a temporary pause, to record its busiest summer on record.

Driving this resurgence was a third quarter brimming with blockbuster deals, including a spate of transactions worth more than $5bn across a range of industries spanning telecom, oil & gas and semiconductors. In September alone, deal value was up almost 75 percent year-on-year (YOY).

However, wind back the clock to earlier in the year and it was a different story. Despite a strong start to 2020, global M&A activity hit the buffers in Q2 2020, a direct result of dealmakers being reluctant to make big moves in the market until they better understood the timeline and the economic impact that the pandemic was going to have.

In H1 2020, the total value of deals announced – both completed and pending – was $901.7bn, 53 percent below the same period in 2019 and the lowest half-yearly total since H1 2010. At the same time, volume fell 32 percent YOY to 6943 deals, the lowest half-yearly volume total since H1 2013.

In terms of Q2 alone, the fall in global M&A was even greater. Total M&A value came to only $309.2bn – a 69 percent drop on the same period in 2019 and the lowest quarterly total since 2006. Volume figures fared somewhat better, falling 49 percent YOY to 2634 deals, the lowest quarterly total since Q3 2009.

“Much of the drop in deal value can be attributed to a collapse in dealmaking at the top end of the market, especially in the second quarter,” says John Reiss, a partner at White & Case. “There were only nine megadeals – deals worth $5bn or more – in Q2, coming to a total of $78.2bn, compared to 25 such deals totalling US$461.1bn over the same period in 2019. Moreover, across the first half as a whole, there were 31 megadeals, 39 percent below H1 2019. All in all, total megadeal value in H1 came to $296.9bn, a 69 percent YOY drop.”

“One of the largest announced transactions of the year so far, Xerox’s unsolicited bid for HP Inc, which would have valued HP at an enterprise value of $35.5bn, was pulled a few weeks after announcement,” recalls Mr Reiss. “Xerox, which announced its takeover offer at the start of March, cited ‘the current global health crisis and resulting macroeconomic and market turmoil caused by COVID-19’ in its decision to abandon the deal at the end of that month.”

Additional deals put on ice include the largest, a $35.6bn merger between insurance brokers Aon and Willis Towers Watson announced in early March, as well as a $20.3bn asset swap between Abu Dhabi National Energy Company and Abu Dhabi Power Corporation, the largest proposed transaction of Q2 and the second largest of H1.

“The impact of the COVID-19 pandemic on dealmaking in the first six months of 2020 was significant but not unexpected,” believes Jana Mercereau, head of corporate mergers and acquisitions for Great Britain at Willis Towers Watson. “Yet regional differences in deal performance and volume revealed in our Quarterly Deal Performance Monitor (QDPM) have been more dramatic.”

According to the QDPM, North America experienced the sharpest fall in M&A performance by some margin in H1 2020, recording the lowest number of deals for a six-month period since the Monitor began in 2009, while, in contrast, Europe recorded three consecutive quarters of positive performance.

“Global M&A activity tumbled to its lowest level in more than a decade in the wake of the COVID-19 outbreak, with most of this decline driven by North America,” continues Mr Mecereau. “Economic uncertainty caused by the pandemic seems to have had a far greater negative impact on the ability of US companies to initiate and successfully complete M&A negotiations.”

Resurgence

Despite the deadening impact of COVID-19 on global M&A activity in Q2, the market experienced a rapid resurgence in Q3, with the busiest summer for blockbuster deals in three decades the result.

In the third quarter, the value of deals more than doubled to $891bn from $372bn in the previous quarter, according to Mergermarket’s 3Q20 M&A Report – a total 32 percent higher than the same period last year. The surge in deals was mostly driven by an uptick in large transactions – those valued at $5bn or higher – with 36 beyond that threshold. Moreover, September 2020 recorded the highest monthly global merger total in 15 months.

“In the face of the global COVID-19 pandemic and economic lockdown, quarterly merger activity surpassed $1 trillion during the third quarter of 2020,” notes Matt Toole, director of deals intelligence at Refinitiv. “Whether it is delayed merger announcements held over from this past spring, the arrival of opportunistic strategic buyers or private equity buyers flush with cash and friendly credit markets, there is no question that dealmaking strongly rebounded far earlier than expected.”

Furthermore, despite the impact of the COVID-19 pandemic on dealmaking throughout 2020, according to Willis Towers Watson’s QDPM, activity in the global M&A market year-to-date represents its first positive performance in three years for completed deals.

“Instead of collapsing under the weight of COVID-19, M&A deals have defied gravity,” says Duncan Smithson, senior director of M&A at Willis Towers Watson. “Compared with previous economic cycles, the amount and diversity of capital available for M&A is extraordinary, assisted by historically low interest rates. Buyers who act decisively and with robust due diligence to exploit opportunities during this period of uncertainty could see higher returns than their industry peers and drive long-term growth.”

Notable transactions

In its ‘M&A Review: 3Q 2020’ report, Refinitiv points to a series of notable transactions across the technology, financials, energy & power and industrials sectors which helped lift global M&A activity out of the doldrums in the second half of 2020.

According to the report, dealmaking in the technology sector accounts for a record 17 percent of global M&A in 2020, with $377.2bn of deals announced, up 25 percent compared to last year and a 20-year high. Furthermore, M&A activity in the software and semiconductor sub sector account for 51 percent of overall dealmaking in the sector. In terms of key transactions, the $40bn acquisition of UK-based Arm Ltd by Nvidia ranks as the top announced technology deal during the first nine months of 2020. By number of deals, tech M&A is up 3 percent compared to the same period in 2019.

M&A targeting the financials sector hit $323.2bn year-to-date in 2020, down 11 percent compared to 2019 levels. Nearly 53 percent of worldwide financials dealmaking was concentrated in the bank and insurance sub sectors, totalling $170.1bn. Activity was bolstered by the $33.9bn takeover of Russia’s Sberbank by the Russian National Wealth Fund and the $30.1bn combination of Aon and Willis Towers Watson, which rank in the top 10 announced deals worldwide.

Dealmaking in the energy and power sector accounts for 13 percent of global M&A so far this year, with $284.2bn of deals announced, down 28 percent compared to a year ago and the slowest year-to-date for the sector in seven years. M&A activity in the oil & gas and pipelines sub sector accounts for 59 percent of overall dealmaking in the sector and holds claim to the top announced deal of the first nine months – the $49.1bn acquisition of PetroChina’s pipeline assets by China Oil & Gas Pipeline.

Finally, in the industrials sector, Refinitiv notes that spinoffs from United Technologies and the buyout of the elevator technology unit of Germany’s Thyssenkrupp AG saw dealmaking in this sector account for 12 percent of global M&A. In total, $262.2bn worth of deals was announced, down 17 percent compared to last year, and a five-year low. Additionally, M&A activity in machinery and transportation and infrastructure accounts for 59 percent of overall dealmaking in the sector.

“M&A activity is picking up across virtually all tech sectors in the US,” observes Ken Marlin, founder and managing member at Marlin & Associates. “Until recently, cross-border tech M&A transactions have been in the doldrums. It is a result of general risk aversion combined with reluctance by many people to get on airplanes or to meet in groups which has made it a challenge for buyers and sellers to really get to know each other, or to negotiate, or to conduct due diligence reviews.”

Potential impediments

While deal value, if not deal volume, has driven the resurgence of M&A activity in 2H 2020, numerous potential impediments, such as geopolitical machinations, legislative changes and COVID-19, lie in wait to stifle the recent uptick in activity.

“Pandemic infection numbers have declined in some regions while surging in others,” says Mark Druskoff, data-driven content coordinator at Mergermarket. “Brexit looms large on the horizon in Europe, which could have a deleterious impact on M&A. The fallout from the US presidential election and civil and social unrest create a number of question marks, including possible changes in tax laws spurring some business owners to pursue sales processes. Meanwhile, geopolitical tensions continue between the US and China.”

In the view of Mr Marlin, the main impediment to global M&A in the months ahead will emanate from the political arena. “Our biggest challenge is not regulatory measures or tax policy, it has to do with politics,” he contends. “Suddenly, nationalist politicians around the world are taking protectionist views. If the trend continues, there will be significant negative economic impact to multiple economies, including that of the US.”

Prospects for 2021

As 2020 gives way to 2021, companies across the globe are busy evaluating their post-pandemic game plans, with M&A likely to play a pivotal role in bringing those plans to fruition. That said, although M&A activity in the second half of 2020 is demonstrably stronger than the first, dealmakers should not assume that a corner has been turned.

“The overall anaemic deal volume could be a sign that, although dealmakers have forged ahead with high-value transactions, plenty of uncertainty remains in the global economy,” concurs Mr Druskoff. “Pandemic infection numbers have improved but not stabilised, geopolitical tensions are on the rise, and key economies are dealing with civil and political turmoil.”

In the view of Mr Smithson, it is too early to interpret the flurry of announced deals in recent months as a sign that M&A is on the rebound. “Our research on completed deals and their performance provokes a more cautious response,” he concludes. “With the volume of completed deals at its lowest in a decade, and performance of North American deals at rock bottom, fuelled by an enduring pandemic as well as economic and political uncertainty, buyers need to be both bold and careful.”

© Financier Worldwide

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Fraser Tennant