Q3 2020 SS&C Intralinks Deal Flow Predictor: What’s Ahead for M&A Activity in North America Post-COVID-19?
Dealmakers in the region brace for the pandemic’s potential effects on M&A deal activity.
19 May 2020
Early-stage M&A activity in Q1 2020 indicates that worldwide new M&A deal starts gradually weakened during the quarter, according to the just-released Q3 2020 Intralinks Deal Flow Predictor. January’s 13.4 percent increase in worldwide early-stage deals, driven by EMEA and North America, turned into a 10 percent decline in March, with the biggest falls in activity seen in North America (-27.1 percent).
Shelter-at-home directives and enforced business closures enacted globally to reduce the infection rate of COVID-19 unquestionably saved lives. In the process, economies ground to a halt and M&A activity stalled at the end of March. We have observed a steady decline in deals since then. Market and deal dynamics have caused potential acquirers to adopt a “wait and see” strategy. As deal activity decreased, the number of distressed assets increased while valuations remained steady.
Private equity’s record pile of more than USD 2.5 trillion in dry powder and corporates in non-to-minimally impacted industries with deep cash reserves will be the first out of the gate once valuations start to normalize. It’s also expected that there will be industry consolidation in hardest-hit industries such as Transportation (specifically, Airlines), Real Estate and Oil & Gas, while companies tied to discretionary consumer spending (i.e., Retail) will turn to bankruptcy protection to survive.
Pumping the brakes
While we have seen a slowdown in M&A transactions due to the coronavirus pandemic, we have also observed a good number of deals moving forward. That said, it is yet to be seen if material adverse effect (MAE) clauses will be leveraged by buyers who develop cold feet to terminate or postpone a transaction if a target company suffers a dramatic downturn in their business.
Tech, Telecom and Pharma remain strong and will likely pursue acquisitions as valuations decrease. Unicorns – privately held startups with a valuation of more than USD 1 billion – will likely be prime targets for market-dominant big tech companies. Finally, PE’s that have been sitting on the sidelines will make a run at distressed assets and other devalued buys.
Reasons to be cautious and optimistic
Short-term challenges revolve around transactions that are in the pre-signing stage which could cause buyers to re-evaluate or suspend a transaction. Deals could also be delayed due to a buyer’s inability to inspect an asset due to travel restrictions or company policies.
One of the obvious long-term challenges hinges on the time it will take for regions within North America and across the globe, frankly, to open back up and for the economy to rebound. The longer the pandemic drags on, the more delays in starting or resuming M&A transactions. The double-edged sword here is the looming concern of a second wave of the pandemic if reopening occurs too soon. The other question is, if/when a government bailout occurs, what will the level of funding look like and which industries will benefit?
There is a high level of confidence that once the virus is brought under control and North America opens up for business again, there will be a flurry of M&A activity which some are predicting to occur as soon as Q3 2020 and as late at Q1 2021. Until then, we are observing advisory and corporate M&A teams evaluating their current processes and, in some cases, reengineering the ways their teams traditionally approached the deal process.
Some specific areas that are being reevaluated include how firms market deals with potential bidders as well as the process around performing due diligence on target assets. Fintechs are leveraging machine learning/artificial intelligence to allow for more streamlined due diligence as well as platforms that track NDAs/SIMs along with bid management, so there’s never been a better time to invest in technology.
The Q3 2020 Deal Flow Predictor dives deeper and provides reasons for M&A dealmakers to be cautious and optimistic. The issue also includes a spotlight on M&A shareholder activism and an interview with Sen Zhang, director of global fund management at leading Chinese private equity firm JD Capital, on the state of private capital. I invite you to download your copy here [LINK].