28 Jan 2021 10:32 AM

The humanitarian and economic impact of the Covid-19 pandemic has, on any criterion, been devastating on a global scale. 

The pandemic has hugely accelerated the pace of change in technology, distribution and working practices and, as a result, organisations around the world have had to adapt rapidly. Microsoft CEO, Satya Nadella, remarked only a few months into the pandemic that ‘two years of digital transformation had occurred in just two months’.

Strong business leaders will follow an immediate response to the crisis with a re-evaluation of the company’s position and long-term strategy. Many sectors and companies will need to reinvent themselves to survive. This may involve the consideration of acquisition opportunities, mergers, disposal of non-core assets and exit strategies. Uncertain times create opportunities and as a result M&A is now poised to play a central role.

By early January 2021, some signs emerged that the downturn in M&A activity may prove to be of short duration. In the first half of 2020 Global M&A deal activity declined 49% by volume and 22% by value. However, there was a strong bounce back in the second half of 2020 with deal activity by value up 79% on the first half (source: Refinitiv). Technology, media and telecoms (TMT) was the largest sector by deal value for the eighth year in a row, an indicator strongly resonating with the point made above on digital transformation.

Rebounds in M&A activity tend to start with distressed deals such as forced asset sales or bankruptcies, before moving on to strategic transactions aimed at achieving cost synergies. In the latter stages of the cycle, the focus shifts to growth acquisitions of non-core businesses and cross-border transactions.

There are several reasons why the downturn in M&A activity in this cycle may prove to be relatively short. Firstly, corporate balance sheets are typically in better shape compared to previous downturns and the availability of cheap financing is at pre Covid-19 levels. Secondly, the private equity industry is sitting on an estimated $1.7 trillion of unallocated funds and is under pressure from investors to deploy aged capital. As a result, in recent quarters private equity has taken a more active role. In Q3 2020 the value of global buyout deals was $148bn, 10% higher than in Q3 2019. Thirdly, it would appear that many transactions in the deal pipeline were postponed rather than cancelled, leading to significant pent-up demand for M&A solutions.

The impact of the Covid-19 pandemic is also likely to influence the type of deals. While some of the impact is temporary, this crisis is likely to lead to fundamental changes in consumer behaviour, supply chains and working practices. Many companies have been forced to reconsider their supply chains from a resilience point of view, rather than just efficiency. For some companies M&A may be the fastest and simplest way to adapt to a post Covid-19 world. In the near term, sectors that are connected to technology, healthcare, life sciences and government spending are likely to be the primary focus for deal activity.

If your business is exploring an acquisition, sale or some form of collaborative process, please contact one of our corporate finance specialists to discuss your plans in confidence.