COVID-19 grinds dealmaking to a halt, but some sectors could rebound more quickly than others

Hogan Lovells Deal Dynamics

Deal volumes fell across all major sectors during Q1 2020

Energy and natural resources deals had the largest decline

The total number of transactions slumped across the financial institutions, real estate, and consumer sectors


In the first quarter of 2020, no sector was able to avoid the declining ­­­­interest in M&A caused by the expanding COVID-19 outbreak, which not only dampened appetite for new deals, but cast doubt over whether some pending deals will complete.

Globally, deal volumes fell in every sector during the first quarter compared with the fourth quarter of 2019, led by energy and natural resources (-31 percent), financial institutions (-29 percent), real estate (-29 percent), and consumer (-21 percent). 

John Duke, M&A Partner – Consumer, Philadelphia

After being bolstered by several mega deals in 2019, aggregate global consumer deal value slowed to US$67.5 billion in the first quarter of 2020, a 41 percent decline from the fourth quarter of 2019. The sector has already seen five major bankruptcies this year, and more are expected as measures to combat the spread of COVID-19 continue to force shutdowns of retailers, entertainment, and lodging venues. It is likely that the aftermath of the pandemic will lead to significant restructurings later in the year.

Even before the outbreak, lenders were pulling back because of rising valuations in the sector. Now, with significant volatility and uncertain outlook, it seems unlikely that lenders will increase their exposure to consumer businesses in the short-term. Experienced financial buyers will likely take a wait-and-see approach, at least for the next few months.

Strategic cash buyers, on the other hand, are expected to drive the rebound, followed by private equity, which remains interested in the consumer sector and should return when it regains some stability. Most buyers will likely avoid using stock as deal consideration in the near term as volatility in the equity markets persists. 

Much depends on how long the quarantines, stay-at-home orders and travel bans endure. If countries get back to normal activity within the next few months, there may be a surge in consumer M&A activity. Consumer demand is likely to accelerate as the lockdowns are lifted, which could capture the interest of prospective buyers. It is expected that many companies will re-evaluate their portfolios and may consider alternatives for lines that will take longer to recover.

The bigger challenge may be valuations coming off a period of historically high deal prices in the consumer space. For sellers, it may be difficult to adjust expectations for a distressed environment.

It is possible that the first signs of increased deal activity in the consumer space will come from distressed smaller companies, especially those that lack a significant online presence or were more leveraged heading into the crisis. As delivery delays grow, smaller companies will struggle.

There are a few bright spots. Food manufacturers and retailers, and companies that make personal protective equipment, or other goods used in fighting the pandemic, could attract some deal cash that is currently on the sidelines.

Ben Higson, M&A Partner – Energy, London

Aggregate global energy deal value fell to US$79.8 billion, a 49 percent decline from the fourth quarter of 2019, but this figure does not tell the whole story. While the COVID-19 outbreak may be a longer-term driver of deal activity, it is not the only factor affecting Q1 transactions. A price war between Russia and Saudi Arabia has led to a surplus of oil, even as demand has been crushed by lockdowns in most countries that have kept people at home and left their cars sitting idle. Gasoline stockpiles are rising. With factories shut down, natural gas demand has also waned.

Against this backdrop, crude prices posted their biggest percentage declines on record, losing more than half their value in March alone, and by the end of the month crude was selling at its lowest price since 2002.

In the short term, distressed asset sales can be expected, as companies struggle to restructure and meet debt repayments. It is anticipated that these will primarily be concentrated among smaller independents and the less profitable assets of larger players.

Recently, there has been an increase in protectionist activity in countries such as the United States, as oil companies lobby for import tariffs or production quotas to blunt the price declines. Dealmakers may wait to see whether any of these moves help to stabilize prices, or whether Russia and Saudi Arabia reach an output agreement.

Other long-term factors will also affect deal activity later this year, once the COVID-19 crisis eases. The impact of climate change cannot be underestimated. The public’s view of fossil fuels is changing, with more motorists favoring electric vehicles and increasing renewable sources of power, which could lead to permanent demand declines for crude oil and gas. 

More majors and large integrated companies, responding to these factors and shifting public attitudes, may begin selling assets that do not fit with their longer-term strategy.

Lea Ann Fowler and Ana Tenzer, M&A Partners – Real Estate, Denver

Real estate transactions totaled US$86 billion globally in Q1 2020, a 27 percent decline from the fourth quarter of 2019. The response to the pandemic may have a lasting impact on some sectors in Q2 and thereafter, particularly commercial office space. As more people work remotely, companies may rethink their office needs, and many larger companies in particular may reduce their physical footprint. For the same reason, co-working spaces will continue to present a compromise for reducing office costs while offering workers some flexibility.

So far, lenders are trying to honor deals already in the pipeline, even if the properties are in distressed sectors. While debt funds are under stress, banks will continue to lend to established, creditworthy borrowers in industrial and multifamily sectors, to the extent of their liquidity.  Lenders are bracing for an increase in workouts and loan modifications of commercial loans secured by retail, hospitality, and office product types.

Sub-sectors that had been strong, such as multi-family housing, may begin to falter as unemployment claims rise. In the United States, if those states that have been less affected by COVID-19 can lift their lockdowns more quickly than states with larger numbers of cases, we may see workers migrating toward areas where the economy is rebuilding, which could shift housing demand significantly.

On a more positive note, the market is seeing more cooperation between landlords and tenants and borrowers and lenders, with landlords negotiating rent deferments for as long as six months in some cases. This level of cooperation, which was not seen in past recessions, may prevent some distressed property sales in the short term, but the overall economic impact will certainly depend on the length of time that the lockdown and “stay in place” orders last.

The industrial space will likely remain strong, as it has for several years now. As long as consumers continue to order more products online for food, household items, and other daily needs, warehouse space will be in hot demand.

However, more speculative markets are likely to see value adjustments. Many retail stores and restaurants that have shut down may not reopen, leading to empty retail centers — which is one reason why an already struggling retail industry is likely to be the hardest hit sector.

Litigation over leases may be on the horizon, especially with big-box retail tenants seeking early terminations or reliance on force majeure clauses to avoid performance of their lease obligations during the period of the moratorium.

With government bailouts, tenants and landlords may be able to weather the downturn, provided that loans extended to small and large businesses come through in a timely enough manner to prop up depleted revenue sources.

Tim Brandi, M&A Partner – Financial Institutions, Frankfurt

Deal value in the financial institutions sector in Q1 2020 totaled US$141.5 billion globally, with the United States and China leading the decline in deal volume from the fourth quarter of 2019.

Investment banking and wealth management were already experiencing a scarcity of deals before the COVID-19 outbreak, and the market has only grown more challenging. The economic impact of the coronavirus response, in particular the deteriorating quality of loan books, its detrimental effects on regulatory capital, and increased funding costs for credit institutions will no doubt temper M&A deal activity this year, particularly in the banking sector.

On the other hand, the market may see the return of distressed asset transactions and, in particular, non-performing loan sales. Troubled lenders may also be of interest to financially potent competitors and restructuring specialists. 

The fundamentals for dealmaking in the sector differ from region to region. In the United States, for example, the regulatory environment remains favorable for transactions and financial firms continue to enjoy some lingering benefits from tax reforms. In Europe, however, cross-border dealmaking in the banking sector is still hindered by the lack of full harmonization of national regulatory environments among EU member states – despite the progress achieved in this respect over the past few years. 

Many financial firms, looking beyond the current crisis, still need to improve their digital capabilities, which could translate into an uptick in deal activity later in the year. Some serial acquirers may look to expand in the FinTech sector as existing players mature. Before the COVID-19 outbreak, consolidation in the FinTech sector had just begun to pick up steam. It remains to be seen whether the crisis will accelerate this process or whether weaker players in the FinTech sector will simply disappear or go into insolvency.

The payment sector has seen limited impact from the COVID-19 outbreak. While spending volumes will likely shrink with more and more consumers being unemployed or on reduced working hours, spending habits are likely to transition to digital payments as result of consumers' fear of contagion linked to cash payments. Still, it is unlikely that the deal volume of past years will continue in the payment sector because consolidation has reached a level where the sheer size of the market players and antitrust considerations limit the room for further acquisitions.

Conclusion: Cash is king — for now

Across all sectors, buyers and sellers appear to be exercising a degree of patience, waiting to see how long the crisis persists. While an increase in distressed assets sales in a few months' time is likely, and some industries, such as technology and manufacturing, may recover more quickly than others, such as lodging and retail, buyers will likely hold onto cash in the short term until the outcome of the pandemic and its impact on the various sectors becomes clearer.


Authored by Tim Brandi, John Duke, Lea Ann Fowler, Ben Higson, and Ana Tenzer.


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