Global dealmaking is locked down. Last week no merger or acquisition worth more than $1bn was announced anywhere in the world for the first time since 2004.
And the 11,413 mergers and acquisitions worth $767bn announced for 2020 to date are the lowest level since 2013, according to Refinitiv.
Part of the problem is that no one can get out for meetings, or do legally required due diligence: it’s well nigh impossible to make sure that a factory actually exists or a company’s books balance when it is shut down and your potential validators — auditors, junior lawyers and the like — are at home due to coronavirus.
But a fall this deep has other drivers. After all, the Gulf sovereign wealth funds have put the word out that they are going shopping, much as they did during the financial crisis. Saudi Arabia’s Public Investment Fund has agreed to buy a majority stake in English football club Newcastle United and 8.2 per cent of cruise operator Carnival.
Bankers say they are also hearing from potential Chinese purchasers: CNIC, a state-backed fund, was reportedly sniffing around India’s Greenko, a renewables group, and consumer group Fosun said late last month that it was planning to “capture the value investing opportunities amid the cycle of asset price downturn”. And private equity funds have a long history of moving in on companies during times of woe.
Meanwhile, share prices have plunged and companies worldwide are struggling to stay afloat. Many government aid programmes are proving hard to navigate and bills are mounting. Even previously strong companies such as Disney, CocaCola and Primark have seen revenues tumble or even disappear. The longer the lockdowns drag, the higher the pressure will mount, especially if the virus returns.
“If I get an offer with a 40 per cent premium over my share price, it’s quite punchy for a board to say: ‘Go away, I won’t even talk to you,’” says one M&A adviser. “In 12 months’ time, the world could be really ugly. If I’m an investor, wouldn’t I rather take the cash today?”
Yet both buyers and sellers have reason to be wary. The S&P 500 is now down roughly 16 per cent from February highs, but it has recovered more than half its initial losses. Selling now could make a board look stupid — or desperate — if share prices continue to rebound. “It is so hard psychologically for a board to sell at a price below their 52-week high which they reached only two months ago,” says Alan Klein of law firm Simpson Thacher. Selling too cheaply, whether the entire company or a discounted stake to an anchor investor, can also open boards up to investor lawsuits.
Buying now is equally risky. The prospects for so many businesses remain so profoundly murky that it is all but impossible to tell whether they are fairly priced. And investors who fear overpaying have plenty of cautionary tales.
Back in April 2008, TPG’s founders had dreams of replicating the profits they had reaped by rescuing lenders during the 1980s savings and loan crisis. So they led a $7bn bailout of Washington Mutual that initially looked like a great idea. But the buyout firm’s equity investment was wiped out just a few months later, when WaMu was hit by a deposit run. Regulators shut it down and handed its operations to JPMorgan Chase. Similarly, Bank of America thought buying Countrywide Financial in January 2008 for $4bn in stock would give it a chance to become America’s top mortgage lender. By 2014, it had lost at least $50bn on the deal.
Cross-border deals appear particularly risky right now. Protectionist sentiment was already rising before the pandemic hit and the huge share price declines have stoked fears of a fire sale of prized companies and strategic assets. India has introduced measures against Chinese foreign investment, and EU trade commissioner Phil Hogan last week warned the bloc’s trade ministers to toughen their scrutiny of foreign takeovers. Australia has already tightened up its rules and Sweden is looking to do the same.
So is M&A dead? If history is any guide, blockbuster deals are going to become rarer. Refinitiv’s data show that after the financial crisis, dealmaking did not return to 2007 levels until 2015. That was partly because companies had other calls on their cash. “Over the past five years, companies could do everything, dividends, share buybacks and M&A. That is no longer the case,” says Blair Effron of Centerview Partners. “Now it is going to be about capital allocation, do investors like you, and do you have a good record on M&A.”
Smaller deals and sectors less affected by the crisis are likely to rebound first. Back in 2009, pharmaceutical groups were the order of the day. This time, it might well be finance and tech. Two of the few deals to have been announced since the pandemic began to affect the west include an April announcement by SoFi, the SoftBank-backed fintech, that it would pay $1.2bn for Galileo, a payments platform, and Microsoft’s late March purchase of Affirmed Networks.
Tellingly however, Warren Buffett, who made at least $10bn with a series of well-timed investments during the financial crisis, has yet to show his hand.
Follow Brooke Masters with myFT and on Twitter
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Looking for M&A deals is risky now for both buyers and sellers - Financial Times
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