M&A activity in Europe at the start of 2020 was not dissimilar to the same period in 2019. The market was strong, with transactions fuelled by high equity prices and buoyant financing conditions. Even in the face of ongoing macroeconomic challenges and BREXIT, activity was robust and the global M&A market was seeing an increase on the previous year in total deal values.
M&A activity constricts as COVID-19 spreads
With the spread of the COVID-19 virus, equity and high-yield markets have witnessed large swings, creating uncertainty in valuations. Moreover, with the potential of a recession looming, debt financing has become more challenging. Nevertheless, we have seen the announcement of several major transactions that were already underway pre-crisis, including companies disposing of non-core assets.
In the immediate term, we expect a slowdown in M&A activity as companies focus on shoring up liquidity, cost efficiencies and, when needed, raising equity. The adoption of remote working practices will also slow down regulatory checks, prolonging the time from announcement of a transaction to closing.
In the event of a prolonged crisis, we can expect to see transactions taking place based on three drivers:
- Well-capitalised strategic and financial buyers, using this opportunity to build sizeable positions in the market.
- Larger Independents and Corporates selling or spinning off non-core assets to address liquidity, leverage and valuation issues.
- Large investors contributing capital in exchange for significant equity stakes in businesses in need of a recapitalisation or with liquidity constraints.
A way back to healthy M&A markets
Once the COVID-19 crisis ends, we anticipate traditional merger activity to resume on the back of rising share prices, increasing confidence, and improved financing conditions.
In the early stages of stabilisation, we expect the re-emergence of leveraged buyouts, because of increased access to financing and the significant amount of equity capital raised by financial sponsors in recent years, further boosting what has historically been a healthy private equity market with announced M&A volumes globally growing. We also expect to see early consolidation in hard-hit sectors, where leading companies in the industry will acquire struggling firms, exploiting synergies and achieving scale to consolidate their market leadership.
Finally, we expect a renewed use of equity as form of consideration for transactions among corporates, prior to moving back to debt financing, a trend witnessed during the financial crisis in 2008-2009.