In the past seven days, a higher volume of deals has fallen apart than been announced. The stark statistic, aggravated by
Those that successfully ride out the crisis are likely to find a very different landscape waiting than the one they expected going into 2020. A decade-long boom in mergers and acquisitions, marked by some of the largest transactions in history, ground to a halt in March as the pandemic sent stock markets reeling and slammed debt markets shut.
Instead of lingering over the drop in M&A activity -- down more than a third this year to the lowest level since 2014 -- dealmakers are trying to focus on the most resilient sectors and opportunities that might be waiting on the other side of the pandemic. Bloomberg surveyed bankers to ask which industries might be the first to see renewed activity, which strategic deals still make sense, and whether private equity firms will use their vast stockpiles of dry powder to snap up cheaper targets.
The opportunities may not emerge for some time, and could be few and far between when they do. The S&P 500 fell 18% this year through Monday, and a plunge in U.S. hiring is already hinting at the longer-term extent of the pandemic’s toll on world economies. And agreed deals are falling apart on a daily basis, with U.S. aerospace suppliers
Still,
“Once investors are more confident that negative tail outcomes are unlikely, we expect significant public activity across all sectors and product classes,” said Ludwig, head of Americas equity capital markets at the bank. “And we expect that to occur in a reasonable period of time.”
Health-Care Deals
The race for treatments and a vaccine for Covid-19 has turned a spotlight on the health-care industry. Pharmaceutical giants are already teaming up with tiny biotechnology firms to develop experimental therapies for the virus, and
“Health care is a sector that might have interesting opportunities as a result of this crisis and is one of the sectors that has had the least impact,” said
One of the biggest deals of the year,
The industry is also proving a bright spot in a largely moribund market for initial public offerings. Zentalis Pharmaceuticals Inc., a clinical-stage cancer treatment developer, increased the size of its share sale and rose 29% in its New York trading debut Friday.
“Sectors like technology and health care will be at the front end of the recovery,” said
Microsoft Corp. sealed one of the biggest deals announced in the second half of March, agreeing to
All-Stock Transactions
As equity prices plummet, stock deals -- which allow a target company’s investors to share in the benefits if the market recovers later, and don’t require funding -- are likely to become more compelling.
The biggest deal of 2020 so far,
“When the market does come back we expect to see a lot of stock deals,” Ramsey said. “We continue to see a lot of dialogue around joint venture activity as well.”
Stable Sectors
When the economy stabilizes after the crisis, the first wave of deals could involve companies looking to fix supply chain problems or get their operations back on track.
“Transactions driven by strategic need will come first,” said Citigroup Inc.’s head of EMEA M&A,
Such deals could take the form of an automaker or industrial company, for example, buying a supplier to diversify its supply chain or reduce dependence on foreign components.
Infrastructure assets -- characterized by stable cash flow from long-term contracts -- could be particularly appealing both to buyers and to lenders, which have shown willingness to finance such deals despite shying away from most leveraged buyouts.
Defense Strategies
For now, advisers are doing more conference calls than usual with nervous clients across various industries than working on actual deals. While these meetings are usually focused on information-gathering or liquidity needs, bankers are zeroing in on the companies that could use their advisory services most once the crisis is over.
Defending against opportunistic bidders and keeping activist investors off their backs seems to be top of a lot of executives’ minds, especially as lower valuations make buying into a stock more affordable. While some activists have given their targets
“People are increasingly thinking about activist preparedness and raid defense in light of the market dislocation and low stock prices,” Ramsey said. Some have even proactively adopted so-called poison pills to
Raising Debt
Some large debt deals have also raised hopes that deep-pocketed buyers could go shopping for targets that now have lower valuations.
Airbnb Inc. said Monday it’s raising $1 billion in debt and equity securities. While the money could help the home-rental company weather the economic crisis without going public, it could also allow the company to snap up businesses struggling to survive the crisis, Bloomberg News has
Private Equity
While private equity firms have their hands full for now managing struggling portfolio companies, they’re still sitting on a $2 trillion war chest that could be put to work as valuations stabilize. Some of the hardest-hit industries -- from energy to tourism and restaurants -- might provide the biggest bargains.
During the last financial crisis, buyouts dived from an all-time high of $246 billion globally in the second quarter of 2007 to $24.5 billion in the third quarter of 2008, during which Lehman Brothers Holdings Inc. filed for bankruptcy, according to data compiled by Bloomberg. Dealmaking took two full years to surpass 2008’s top quarter and hasn’t yet reached $100 billion in a single quarter again, the data show.
Waiting Mode
Many potential buyers may choose to wait out the crisis before making any big moves, instead holding onto much-needed cash and focusing on running their own businesses. Apollo Global Management Inc. recently
The crisis “will certainly have a lasting impact given the drastic effect on the global economy,” said
--With assistance from
To contact the reporters on this story:
To contact the editors responsible for this story:
Elizabeth Fournier, Ben Scent
© 2020 Bloomberg L.P. All rights reserved. Used with permission.
To read more articles log in.
Learn more about a Bloomberg Law subscription.