M&A Deal Update: The Current State of the M&A Market

This article is an excerpt from The Northern Edge Deal Update for Spring 2020. Get the full pdf here.

While the future of economic recovery and M&A deal-making remains uncertain, now more than ever – preparation is key.

With large portions of the global economy in shut-down mode due to widespread lockdowns and shelter-in-place orders, M&A activity has also been upended. According to analysis from Dealogic, the value of M&A activity in the first quarter of 2020 was down 35% globally (and 39% in the U.S.) compared to the last quarter of 2019. $618 billion worth of deals have been completed worldwide in 2020 compared with $956 billion by this time last year.

According to recent analysis from RBC Capital Markets, obstacles affecting deal-making include (1) a shift in mindset of corporate buyers towards prioritizing operational management issues and employee welfare, as well as shoring up liquidity; (2) valuation volatility impacting the ability to get negotiated deals over the finish line; (3) logistical challenges in managing the transaction process, such as the moratorium on in person meetings; and (4) global economic uncertainty, which makes it difficult for buyers to adjust their projections and consider future strategic combinations. Concurrently, private equity firms have been impacted on both the sell and buy-side.

Looking ahead

According to the recent PwC COVID-19 Pulse Survey, which polled CFOs and finance leaders between April 6th and April 8th, “realities of managing through a downturn are settling in.”

With regards to recovery time frames, 61% of CFOs surveyed believe they can be back to business as usual in less than three months, while another 18% think that it will take six months or more to recover.

When it comes to mergers and acquisitions, companies have a split outlook, with 49% taking a wait-and-see approach and 51% moving forward with plans. Those companies with cash may have an aggressive appetite for M&A, with 17% noting increased interest given current valuations.

A second-half of 2020 deal window could open pre-election, according to RBC Capital Markets.

While the future of economic recovery and M&A deal-making remains uncertain, it is important to keep the following factors in mind if considering a transaction process:

Preparation is key:

Now more than ever, it is imperative that you discuss potential financial and operational impacts of the outbreak with your investment banker and plan accordingly.

Due Diligence:

Buyers and sellers should adjust expectations and timetables. The use of technology (virtual data rooms, web conferences, etc.) can mitigate potential delays. Your investment banker should be able to provide access to one.

In-person Meetings:

In-person meetings with potential buyers are extremely important to the transaction process. Choose an investment banker with robust infrastructure and a global footprint as well as access to digital communication channels to counteract travel restrictions.

Valuations:

Market volatility might affect company valuations throughout the process. Talk to your investment banker about preparing for negotiations. Also, be mindful of the potential impact of buyer’s financing and review acquisition financing documentation accordingly.