Covid-19 impacts M&A dealmaking

Given the known effect of the coronavirus outbreak on businesses, it is not surprising that dealmaking levels declined during the first three months of 2020. In all, just 21,154 deals were announced worldwide during the quarter. This represents the lowest figure for any quarter since Q1 2013, when 21,027 transactions were announced worldwide.

The decline appears to have been sustained into April. As the month drew to a close there had been 5,094 deals worth a combined USD 202,269 million announced. These figures are considerably lower than the same month in recent years. In April 2019, there were 8,941 deals worth a combined USD 364,955 million, while in April 2018, the figures were 9,229 and USD 509,104 million respectively.

While some have pressed the pause button on planned transactions, others have opted to call off intended combinations altogether, and there have been a few high-profile deal casualties as a result of the outbreak.

Spotlight on medical and pharma brands

UK-headquartered diversified engineering player Smiths has put the planned sale of its medical unit on hold as it focuses on manufacturing ventilators and critical care devices. The planned EUR 12.62 billion merger of drug manufacturers Mylan and Pfizer has also been delayed. However, both transactions are expected to go ahead once market conditions stabilise.

Smiths’ decision to concentrate on manufacturing crucial equipment during the coronavirus outbreak highlights the importance of this sector.

While Smiths has delayed a planned divestment due to the coronavirus, others are actually looking at acquisitions in the industrial, electric and electronic machinery industry for the very same reason. Hanvey Group reached a non-legally binding agreement to buy a 51% stake in Hong Kong based surgical mask manufacturer Innovative Corporate Development for HKD 5 million in March, following a surge in demand for the target’s products.

Similarly, Masimo has opted to exercise its option to acquire German respiratory therapy device maker TNI medical well in advance of expiry, with increased demand for the target’s softFlow technology. Chief executive Joe Kiani cited Covid-19 as the reason for the decision.

Although Mylan and Pfizer’s deal is on ice for now, some similarly encouraging developments are evident in the pharmaceutical manufacturing industry. In-vitro diagnostic reagent maker Beijing Applied Biological Technologies secured a Series B round of funding worth CNY 50 million in late March, with proceeds to be used to accelerate the production of diagnostic kits for the European market.

Concessions made to keep deals alive

Despite these heartening signs from certain sectors, media indications suggest that sentiment in other industries is cautious. Last month, Reuters reported that Apollo Global Management and Gray Television, which had been in the running to acquire US television station operator Tegna, have dropped out of the race. Others have offered concessions to keep deals alive; Italian bank Intesa Sanpaolo said it is willing to accept a lower price from BPER for its planned sale of branches to the company.

In addition, Reuters reported Fincantieri’s hopes that, in a bid to minimise any resulting financial crisis, the European Union will soften its competition regulations enough to allow its planned takeover of Chantiers de l’Atlantique to go ahead.

Meanwhile, The Daily Mail reported that the Scottish Football Association could relax rules on dual ownership in an effort to attract investment for its teams.

Decline follows Covid-19’s geographic spread

In terms of the regions affected, Asia-Pacific seems to have taken the biggest hit when compared to the most recent quarter; the 7,467 announced deals targeting companies based in the region represents a 33 per cent decline on Q4 2019’s 11,075 and 19 per cent on Q1 2019’s 9,203.

This is perhaps to be expected: the region has been subject to restrictions on movement and social contact for longer than the likes of Western Europe, which had the second-biggest quarter-on-quarter decline in volume, by 17 per cent, from 6,570 to 5,429. Western Europe’s result represents a 29 per cent drop on Q1 2019 (7,641), although the largest year-on-year decline came in Central and Eastern Europe, which slipped 36 per cent, from 1,864 to 1,201.

The effects of Covid-19 on M&A are widespread, with deal volume in most sectors declining in Q1 2020. In terms of volume, only one sector improved on Q4 2019’s result; the property services industry was targeted in 1,037 deals, up from 1,005 in Q4, while only miscellaneous manufacturing improved year-on-year, from 158 to 177. The biggest decline between Q4 2019 and Q1 2020 was in the leather, stone, clay and glass products industry, which slipped 39 per cent, from 214 deals to 131, over the three months. In a year-on-year comparison, the communications industry took the biggest hit as volume slipped 45 per cent, from 530 deals in Q4 2019 to 291 in Q1 2020.

Ultimately, the long-term impact of Covid-19 on M&A levels is uncertain. It is fair to say that dealmakers are likely to be more hesitant than usual when evaluating potential targets. Time will tell whether a return to normality will see an upturn in deal numbers later in the year.