In many parts of the world, 2020 started out much like 2019 ended – with strong deal demand across developed markets. Currency to strike transactions abounded with stock prices rising to record highs and interest rates hovering above all-time lows. Strategics and private equity firms alike were flush with cash. And, amid forecasts for positive but slowing growth in many markets, companies were looking to inorganic growth to help spark revenue gains. Then COVID-19 arrived, transforming the landscape for dealmaking around the world. Deal Dynamics spoke with Hogan Lovells M&A partners in Asia, Europe, and North America to garner their insights on the pandemic and its impact on M&A.
Stephanie Keen, M&A Partner, Singapore
Asia provided a preview of what the rest of the world was in store for, with a very slow start to 2020 as coronavirus lockdowns gripped the region. Overall, for the first quarter of 2020, the total value of inbound transactions rose a marginal 10 percent year-on-year, while outbound deal value declined 39 percent and intraregional value remained stable. Further, some areas – Singapore, Japan, and Hong Kong, among them – began suffering from the impact of the second wave of the virus, which was more serious than the first wave and, perhaps, a harbinger for more turmoil in Q2 than was widely expected.
Business activity revealed marked differences in countries across Asia. China was the first to suffer from the virus, having breached 1,000 cases by 25 January. As a result, the country all but shut down in the first quarter. The numbers reveal steep declines in M&A activity – an 83 percent drop in the value of Chinese outbound deals and a 28 percent decline in outbound deal volume during the period versus a year ago. However, because it reacted strongly to and suffered early from the virus, China was opening back up for business as the quarter ended and Chinese companies began once again looking for deals, particularly in the infrastructure sector, extending the Chinese government’s long-held recognition of the importance of real assets as an essential part of its overall economy. The Belt and Road Initiative has been a key driver for China’s cross-border investments in the infrastructure sector and this activity will likely persist in Africa, Asia, and Western Europe, where we are seeing depressed prices due to the outbreak.
Some Asian markets fared well during the quarter. International buyers remained interested in investing in companies in Taiwan that are focused on renewable energy projects and technology. Singapore, which acted swiftly to contain COVID-19 in the first quarter, had solid deal activity in sectors such as retail and e-commerce.
The same cannot be said for Japan, where buyers typically rely on site visits and on-the-ground due diligence — activities that naturally have been curtailed with travel restrictions. Before restrictive measures were put in place, Japanese buyers had been specifically focused on transactions in Asia, as well as in Western European markets like Germany, where supply chain companies provide many synergies. Once travel restrictions lift, Japan is likely to be active in the M&A scene again.
E-commerce was a bright spot during Q1, with many companies in this space finding their footing during the extended lockdowns across Asia. Such companies will now be looking to expand, either through raising capital or acquiring other companies. Private equity firms are also expected to be a driver of transactions in the post-coronavirus environment in Asia, after collectively raising large amounts of capital and looking to deploy their dry powder at advantageous prices in the coming months.
Sarah Shaw, M&A Partner, London
European M&A got off to a strong start in Q1 and signs looked promising for the year ahead — until the virus-related restrictions slammed the brakes on economies and deal activity across the continent. By value, overall inbound transactions in Western Europe increased by 123 percent, outbound transactions dropped 14 percent, and intraregional transactions increased 61 percent year-on-year.
In the United Kingdom, in particular, this was aided by the election of the Conservative government in December 2019, which created a sense of stability and removed concerns around a potential Corbyn Government that had chilled dealmaking activity in the country in preceding months. Interest in transactions involving real assets and infrastructure in particular — sectors identified by the new government as priorities going forward — were particularly strong.
However, seemingly overnight, this all changed as the reality of the COVID-19 pandemic became clear across the continent. With intense volatility in the equity markets, companies at best struggling to navigate the new uncertain world and at worst fighting for their survival, deal activity ground to a halt. In this environment, we saw a number of deals that were mid-negotiation go on hold, and companies that had already announced deals explore ways of invoking material adverse change (MAC) clauses or other termination rights to walk away, or at least defer completion.
Whilst it is very hard to predict how long the global uncertainty that is currently hindering price re-basing will persist, we do expect to see a resumption in dealmaking activity across the region at some point later this year because the underlying factors that were driving M&A activity before the crisis hit remain, for example, appetite for technology and infrastructure assets is still high. However, when the market does resume, we expect it to be very different to the one we started the year off with – in particular, it will likely be dominated by private equity and other cash-rich investors looking to take advantage of opportunities arising from assets that have fallen into distress as a result of the crisis.
Elizabeth Donley, M&A Partner, Washington, D.C.
When Q1 began, dealmaking expectations across North America were beginning to shift to anticipate a slowing economy. On a year-on-year basis, the value of North American inbound M&A declined 37 percent and intraregional transactions dropped 54 percent in the first quarter. Still, buyers were looking to M&A to boost their top-line growth, and even through the middle of March, deal activity was relatively promising, as the United States saw at least three mega deals worth an aggregate US$44 billion, despite the market already showing early strains from COVID-19 concerns.
Once the pandemic began to spread aggressively in the United States in the second half of March, the impact was swift. Challenges emerged across the M&A landscape, in pricing, valuation, and risk allocation, and dealmakers began to experience novel logistical constraints on getting deals done.
From a pricing and valuation perspective, the U.S. stock market decline dimmed the appeal of using equity as currency. Simultaneously it became harder to value or price businesses for which revenue and growth slowed, if not stopped, abruptly. Companies focusing on challenges in their own businesses — grappling with unprecedented disruptions in supply chains and to employees and operations — became increasingly less willing or able to consider external M&A opportunities.
Businesses also became acutely aware of increased risk in M&A transactions. Many parties began looking to MAC and other clauses to terminate or revisit deal terms, or to ensure protection from unexpected adversity down the road. Insurance issues emerged and it has been harder for buyers to obtain representations and warranty insurance policies that do not contain exclusions for breaches resulting from COVID-19.
Logistically, it has become difficult to carry out M&A transactions within a social distancing framework. For example, there have been instances of business auctions being shelved because buyers could not conduct appropriate site visits or meet in person with management to properly assess opportunities. And the potential for delays in obtaining regulatory and other approvals has introduced a new hurdle to deals closing on time.
As we look to Q2 and beyond, underlying tailwinds from 2019 for U.S. dealmaking may ultimately soften the decline in M&A activity. Favorable conditions and drivers remain in play, including historically low interest rates, ongoing technological evolution, and healthy corporate cash reserves.
Coming out of the virus-related slowdown, many U.S. buyers will be looking to distressed assets in sectors that were particularly impacted. Others will be making strategic deals to protect their pipeline, especially those that found themselves vulnerable during the coronavirus outbreak.
Authored by Elizabeth Donley, Stephanie Keen, and Sarah Shaw
