Decline in M&A activities
The COVID-19 environment has been causing additional challenges in connection with the initiation and execution of M&A transactions. The current uncertainty has had a negative impact on M&A activities, especially since April 2020. The seller’s market is likely to turn into a buyer’s market, at least in some industries.
What the past tells us about M&A activities
Empirical data show that, in times of economic crises and recessions, M&A activity usually declines. During the last global financial crisis or the dotcom crisis for instance, the annual number of worldwide M&A transactions fell by 31% and 27% respectively, according to Bloomberg data. Data for the European M&A market, which is important from a Swiss perspective, also confirm this.
The latest developments on the M&A market
As a result of the economic crisis triggered by COVID-19, there are currently also signs of a decline in M&A activities. While the number of transactions in the first quarter of 2020 was still relatively stable globally compared to the same period from the previous year, a significant decline in M&A activities was already evident in April and May. Both globally and in Europe, the volume of M&A activities in these months fell by over 40% and the number of transactions by over 30% compared to the same months last year. This is hardly surprising in view of the current pronounced uncertainties, which we described in a previous blog. The following chart shows the development of M&A activities in Europe.
The development of M&A activities in Europe
Source: Bloomberg, M&A and investments with European target companies, as of 9 June 2020.
From a seller’s market to a buyer’s market
Due to the existing uncertainties, we expect the recently observed trend to continue into the coming months. Therefore, we assume a significant reduction in M&A activities overall on an annual basis. Whether M&A activity will – in view of the conflicting influencing factors (e.g. more difficult conditions in a pandemic environment versus low (or even negative) interest rates and still acceptable valuation levels) – decline less and/or recover more quickly than during past crises will depend in particular on how the pandemic develops and thus the course of the economic recovery.
In any case, we expect significantly different developments for the various industries, depending on how heavily affected the respective industry has been by the COVID-19 effects and measures.
In particularly affected industries such as tourism, retail, entertainment and travel, acquisition activity is likely to decline in the coming years. However, as some restructuring cases are also to be expected in these industries, there are also opportunities for bold and financially solvent buyers to emerge stronger from the COVID-19 crisis thanks to targeted add-on acquisitions. In contrast, we expect generally more stable or even increasing investment volumes in the pharmaceutical and healthcare industries, but also in the technology and energy industries.
The extremely low level of interest rates and the positive economic outlook have boosted the M&A market in recent years. Particularly on the seller’s side, it has been possible to benefit from rising demand and thus higher prices during this phase. It is to be expected that, in the current environment and given the outlook outlined above, the original seller’s market will shift towards a buyer’s market, at least in some industries.
The current M&A environment is causing additional challenges for those involved
M&A transactions are currently particularly challenging both for buyers active in the M&A market as well as for companies that decide to disinvest for various reasons. For buyers, not only the upside but also the downside is often greater than under normal circumstances. At the same time, from the seller’s perspective, the goal is to reduce the current uncertainties as much as possible.
Based on our many years of experience in corporate transactions, we will be making recommendations for buyers and sellers in two forthcoming blog posts on how to increase transaction security in the current environment and to contribute to the realization of successful corporate transactions.