Global dealmaking drops to lowest level in over a decade

Coronavirus brought an end to one of the longest waves in mergers and acquisitions history as global dealmaking dropped to its lowest levels in more than a decade during the second quarter of 2020.

Companies have struck just $485bn worth of deals since the beginning of April, down more than 50 per cent from the same period last year when close to $1tn deals were agreed, according to the data provider Refinitiv. The fall in activity was particularly sharp in the US, where overall acquisitions collapsed almost 90 per cent from a year ago, to $75bn.

Dealmaking hit a rough patch in the second quarter as government-mandated shutdowns to halt the spread of coronavirus wreaked havoc on financial markets and caused liquidity to dry up. Against this backdrop companies were largely focused on shoring up their existing businesses and tapping back-up credit lines from their lenders, rather than seeking out new acquisitions. 

“For most of the last few months, although things were extremely busy, the emergence of new deals of substantial size had essentially ground to a halt,” said Eric Schiele, a corporate partner at the law firm Kirkland & Ellis.

Blockbuster deals all but vanished during the second quarter with little appetite from companies to execute large mergers amid a global pandemic. However, a landmark £31.4bn deal between Liberty Global and Telefónica to combine their British operations Virgin Media and O2 in early May helped to resuscitate M&A activity in Europe.

Chart showing global M&A volumes gringing to a halt

There were already signs of a drop off in global dealmaking in the first quarter, which had its slowest start in seven years as companies failed to execute deals of the size seen in previous years. So far in 2020, M&A deals above $10bn are down by 60 per cent from the same period in 2019, and the volume of transactions has hit a seven-year low. 

Private equity firms lead the action

Private equity groups emerged as some of the most active dealmakers this year, accounting for 16 per cent of worldwide activity in the first half, the highest level since 2007. 

The industry is sitting on a record $2.5tn in dry powder — funds that have been committed by investors but not yet spent — and a group of mostly US-based firms have been active in snapping up companies more cheaply throughout much of the crisis. 

Private equity firms have been “occupying a disproportionate part” of global dealmaking “because they were still active deploying capital [when] corporate activity went to zero basically”, said Borja Azpilicueta, global head of HSBC’s financial sponsors group.

Chart showing that private equity groups are some of the most active dealmakers

Several of the buyout deals took place in Europe, including a €5bn agreement by KKR, Providence Equity Partners and Cinven to buy the Spanish telecoms operator Masmovil in June; and KKR’s £4.2bn acquisition of the UK recycling group Viridor in March. The spurt in European private equity activity helped to minimise the fall in overall dealmaking volume to just a 15 per cent year-on-year drop in the region. 

Some top PE executives moved quickly when the crisis began, believing they had failed to take full advantage of the 2008 financial crisis to make bold investments, said Alison Mass, chairman of the investment banking division at Goldman Sachs.

“They’re leaning in now, they’re more mature and seasoned than they were then,” she said.

Buyer’s remorse

Dealmakers who had agreed transactions before the pandemic have started to get cold feet. Forty-four US deals have been pulled since April, almost three times the number withdrawn in the first three months of the year. 

Two of the major deals buyers have tried to retract involve targets that are heavily reliant on international travel, which has essentially ground to a halt since mid-March. 

The Carlyle Group is trying to walk away from a deal to buy a stake in the corporate travel business of American Express, agreed back in December, citing an “adverse event”. Similarly, Far Point Acquisition Corp, the blank cheque company set up by hedge fund billionaire Dan Loeb, has told shareholders not to approve a $2.6bn acquisition of Silver Lake-backed Global Blue due to the company’s worsening “financial condition.” The Swiss payments company derives 85 per cent of its revenue from its tax-free shopping business, which is heavily reliant on international travellers.

Chart showing the decline in M&A by region

Anu Aiyengar, co-head global M&A for JPMorgan Chase, said the crisis might prompt companies to request stricter covenants when striking future deals. 

“The same thing has happened in the past. There was new language post-9/11 and post-2008,” she said. “Every time you have companies try to walk away from a deal, new language gets added [to contracts].” 

Other companies are attempting to renegotiate transactions at a lower price, instead of calling them off altogether. For example, LVMH, Bernard Arnault’s luxury conglomerate, has been looking for ways to renegotiate the $16.5bn takeover of US jeweller Tiffany and Co it agreed in November. 

Looking ahead

Lawyers and advisers told the Financial Times that they were optimistic about the second half of the year — despite concerns about a second wave of coronavirus cases and uncertainty around the looming US elections. Many of them are already starting to see deals trickling in. 

“We are seeing an uptick in inquiries and signs of an uptick in activity,” said Eli Hunt, a partner at the law firm Simpson Thacher & Bartlett. “There are a lot of companies and private equity groups out there with capital, and there is potential opportunity.”

Valuations have declined enough to make some of the companies affected by the pandemic attractive to buyout groups, according to several dealmakers. 

The takeaway food delivery industry is seen as ripe for consolidation, with companies seeking scale by acquiring smaller competitors. Already this year Just Eat Takeaway has sealed an all-stock deal valuing Grubhub at about $7.3bn, and Uber is preparing an offer to buy food delivery start-up Postmates. In Europe more deals are expected in the beleaguered telecoms sector after Margrethe Vestager, the EU’s competition chief, urged companies in the bloc to pursue cross-border transactions. Several lawyers said they also anticipate a wave of mergers among pharmaceuticals and biotechnology companies. 

Kirkland’s Mr Schiel said. “As the current crisis abates, I expect a spike in deal activity as people feel some urgency to pursue any strategic transactions that have been kicking around in the remaining window — before the M&A cycle turns for real.”

Meanwhile, Peter Weinberg, co-founder and chief executive of boutique investment bank Perella Weinberg Partners, struck a more cautious tone.

“Phase one for clients was getting their wits around them and understanding what business was going to be like in a Covid world”, he said. “Phase two was, and is, making sure the capital structure strategy is appropriate for these times. M&A is phase three and we are not there yet.”

He added: “M&A will return when companies and boards have both confidence and clarity on what the future will hold.”