M&A predictions in a post-COVID-19 world: US edition

03 December 2020 - 03:20 pm UTC

by Philip Segal, with graphics by Mate Taczman

  • Buyers paused at the onset of the pandemic 
  • Marked recovery in mega deals in Q3
  • Banner year for SPACs, expected to contribute to M&A
  • Record bankruptcy filings indicate distressed M&A should continue 
In the weeks following the onset of the pandemic, Mergermarket published a forward-looking analysis predicting what the M&A recovery might look like in the US, based on market behavior following the 2007-2008 Global Financial Crisis. To read more of the initial analysis, click here.
Nine months after the pandemic spread in the US, the M&A market dipped considerably and has since partially recovered beginning in Q3 – earlier than predicted. The accelerated recovery was supported by deals in the life science and technology sectors, as well as industrials and business services M&A. Companies in the consumer/leisure sectors have not yet recovered from the pandemic, and deal activity remains low.
Pandemic overwhelms M&A
As site visits and in-person meetings were largely suspended and municipalities went into lockdown, the basic logistics of executing a transaction became a challenge. As a result, new deal announcements were delayed or called off, and there was an initial spike in withdrawn and terminated transactions, the largest of which was Xerox’s failed USD 35.5bn proposed takeover of HP in March.
Some deals managed to hold together, albeit under revised terms. LVMH Moet Hennessy Louis – Vuitton’s USD 16bn acquisition of Tiffany & Co as well as Simon Property Group’s USD 6.3bn acquisition of Taubman Centers were two of the largest deals that revised terms after attempts to terminate the transaction.

Mega deals drive rebound
Although overall activity by count remains subdued, there was a marked recovery in deal activity by value in Q3, buttressed by a resurgence of mega deals that have an enterprise value of USD 10bn or more. There are some broad swaths of the M&A market that have been on ice,” said Luke Laumann, a partner at White & Case. “But the devil is often in the details as to which companies are doing well and which companies are not.”
The rebound in Q3 occurred across sectors, although some areas continue to be plagued by market conditions that make recovery challenging, said J Neely, managing director global lead for M&A at Accenture. “Only a small number of people have returned to offices, people aren’t travelling for work and not using hospitality,” he said.
“Both corporates and financial sponsors participated in the rebound, some opportunistically, while others defensively,” said Kerry Berchem, corporate partner at Akin Gump. She also noted that the recovery was seen across sectors, except energy, where the decline in oil prices has hurt the industry.
As the COVID-19 pandemic took hold late in 1Q20, the US M&A market chilled, declining 85% by value with more than 40% fewer deals announced between March and April. In fact, there were no mega deals announced in the US through all of Q2, which has not occurred since 2010, according to Mergermarket data.
In Q3, 10 mega deals were announced worth a combined USD 150bn. So far in Q4, there has been an additional seven worth more than USD 100bn announced.
The recovery in the second half of the year “sets the table for 2021,” said Neely, highlighting that dealmakers have adjusted to working virtually and are more comfortable doing deals in a post-COVID economy. “We’ve figured out how to do deals in this environment,” he said.
Buyers hit the pause button
Buyers pumped the brakes in immediate reaction to the pandemic’s spread in the US. “Companies had to ask themselves, ‘Do I preserve liquidity before I extend in a deal myself?’” said Neely, adding companies have been more contemplative, not wanting to rush into a deal and risk ”catching a falling knife.”
According to Mergermarket data, there were 623 corporate M&A deals worth USD 56bn announced in the US in Q2, down from 1,162 deals worth USD 166bn announced in Q1.
“During this period, would-be corporate acquirors appeared to shift their focus inward towards initiatives intended to ensure its own business could weather the pandemic and related economic instability,” said Suni Sreepada, an associate for White & Case.
Corporate activity picked back up in Q3, with 875 deals worth USD 343bn. So far in Q4, there have been 543 corporate deals worth USD 260bn.
“There’s pressure for companies to adapt to the newly changed world,” said Neely, noting that the pandemic has changed consumer behavior, such as accelerating ecommerce trends.
Meanwhile, there were 233 leveraged buyouts (LBOs) worth a combined USD 21.2bn announced in Q2, down from 380 LBOs worth USD 51.3bn in Q1.
Private equity buying “slowed dramatically” following the onset of COVID, said White & Case’s Laumann. Most sellers “took a collective breath” to assess what COVID was going to mean for their businesses and their auction processes. Although deals that were already near closing, or had particularly motivated sellers, went through, he said.
That pause resulted in pent-up supply that has hit the market in Q3 and Q4 in what many have said is the largest flow of opportunities for PE buyers that we’ve ever seen,” said Laumann.
In Q3, there were 310 LBOs announced worth USD 74.2bn, and so far in Q4, there have been 188 LBOs announced worth USD 52.2bn.
The environment bodes well for private equity firms, which faced less competition this year from strategic buyers, said Accenture’s Neely. “In the history of M&A, companies that do deals in a down economy tend to do really well,” he noted.
Rich with dry powder, the environment created an opportunity for private equity firms while corporates weren’t quite ready to strike deals, Neely said. Private equity firms are “always happy when they don’t have to bid against strategics,” he added.
“The private equity industry is exceedingly well capitalized and, for the foreseeable future, we should expect to see an active, if tempered, deployment of PE capital,” said Akin Gump’s Berchem.
SPACs crowd market
Part of the recovery in 3Q has been driven by special purpose acquisition companies (SPACs). According to data from sister company Dealogic, there have been 201 SPAC IPOs in the US year to date that have raised a combined USD 69.1bn. SPACs have been targeting increasingly larger deals the past few years, with the average acquisition size growing rapidly to USD 1.37bn from USD 65.9m in 2011 in 2020, Dealogic data shows.
As SPACs can have an acquisition limit date of up to two years, they will likely be active in the market next year. The 2020 SPACs, many of which are PE-backed, have “substantial dry powder and are well positioned to seize upon attractive buying opportunities when and if they materialize in 2021,” said Bercham.
That pressure has historically resulted in favorable deal terms being offered, a trend that is expected to play out with the 2020 issuers, this news services reported. While terms may be more flexible, “valuations are generally determined relative to public company comparable valuations,” said White & Case partner Joel Rubinstein. “Outcomes in 2021 will be dependent upon the market performance of companies in their sector,” he added.

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