The global M&A market roared into this year with enough momentum to sustain its high-flying status, having logged six successive years when worldwide activity rocketed past the $3 trillion mark.1 While the pace of activity showed signs of slowing, it was difficult to see how it might take a precipitous plunge, short of an unforeseen and dramatic act of nature.
But when the COVID-19 pandemic swept into the US, it curbed deal-making significantly. Between February and March, the number of announced deals dropped from 2,349 to 1,984, with deal value decreasing from just over $151 billion to about $130 billion.2 Instead of launching new deals, the urgent priority for many finance leaders was to resolve any in-progress transactions, re-evaluating their strategic assumptions and taking appropriate actions to safeguard their financial positions.
Now, as finance leaders move past the recovery phase of the pandemic and conceive plans for thriving in a changed economic landscape, M&A is poised to play a central role. In April, Deloitte conducted a snap poll of 2,800 US companies, and 70 percent of the respondents indicated they will continue with M&A and, in some cases, accelerate their deal activities over the next 12 months.3 In addition, 31 percent of the 156 CFOs who responded to Deloitte’s Q2 2020 North American CFO Signals™ survey said they expect to acquire distressed assets or businesses over the next year.
Indeed, unique times create unique opportunities. And in this issue of CFO Insights, we’ll consider the role M&A could play in an emerging post-COVID-19 business strategy. How might M&A actually fit in as a response to the COVID-19 crisis? How will such deals be conducted—and structured—in the disruptive era of social distancing? Plus, what additional outbreak-related risks and uncertainties need to be factored into the processes, terms, or timing of any deal?
Poised to transact
As the pandemic’s toll on both the US economy and society becomes clearer, so too will the implications for different industries. It’s safe to say that aviation, hospitality, and leisure have suffered damaging drops in demand. But others, such as grocery, technology, and health, will likely emerge energized, eager to accelerate growth by pursuing M&A opportunities. Still, most sectors will need to reinvent themselves to thrive, and to do so, companies will need to explore a range of inorganic growth strategies, de-risking their approach to M&A by broadening their activities to include partnerships with their peers, co-investments, and cross-sector alliances.
Many companies are loaded with the economic firepower to do just that. The S&P 1200 companies boast a record $3.8 trillion stashed in cash reserves and have the wherewithal to service debt in a dovish monetary environment. And while access to the public equity markets has narrowed, the opportunity exists for offerings that can fit through the window. Moreover, private equity firms have amassed a war chest of $2.4 trillion5 ready to be deployed.
Meanwhile, there are already signs that the pandemic is driving down acquisition prices—reversing the trend of recent years. Yet, even as their company’s business model may be changing, finance leaders need to evaluate prospective deals based on their strategic fit, as opposed to their bargain pricing.
That fit has to take into account the systemic changes occurring within and across industries that have reframed considerations in companies’ abilities to take action, defensively and offensively, on the investment front. All of this leads to a revised set of strategic choice options and scenario-planning tools that can be leveraged to help identify potential game board moves.
Leveraging those tools will help companies identify the new capabilities they require and prioritize the markets where they need to operate in order to safeguard their future and drive growth. Moreover, redefining M&A in terms of these scenarios and choices can help bring much-needed clarity of purpose, while confronting uncertainties in a materially changed post-crisis M&A environment.