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COVID-19 bursts M&A activity optimism

Matthew Toole
Matthew Toole
Director, Deals Intelligence

Deal makers began the year in optimistic mood, with the biggest cloud on the horizon being an unforeseen economic event. Now that those worst fears have been realized, how will COVID-19 impact M&A activity in 2020?

  1. The average predicted M&A growth rate in our deal makers survey had been 4.7 percent, prior to the COVID-19 impact on M&A activity.
  2. The Refinitiv annual Deal Makers Sentiment Survey found that the biggest jump in positive sentiment at the start of 2020 was in Asia.
  3. Deal makers now face reduced capital markets access and increased scrutiny on deal terms, including material adverse change clauses.

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When the annual Deal Makers Sentiment Survey took place in the final weeks of 2019, M&A professionals within corporates proved to be the most bullish.

Deal Makers Sentiment Survey 2020. COVID-19 bursts M&A activity optimism

They told us they were expecting a market growth rate of 7.4 percent during 2020, compared with the 1.3 percent expected contraction for 2019.

However, there was always a risk of derailment. Of those same corporate respondents, 76 percent cited an “unforeseen economic event” as one of the most likely to influence deal making.

Three months into 2020, as COVID-19 spreads around the world, the question is now whether the fundamental drivers for M&A activity are strong enough to cope.

Watch: The Virus Effect on M&A — The Corona Correction

Without doubt, a coronavirus-free world was an optimistic place.

The proportion of deal makers expecting market growth had jumped from 38 percent to 47 percent, while market pessimists shrank from a quarter of respondents to just 11 percent.

The average predicted growth rate, from a sample of 457 deal makers, was a healthy 4.7 percent, compared with a 0.6 percent contraction in 2019.

Anticipated global M&A and capital raising changes in 2020. COVID-19 bursts M&A activity optimism


Outlook for M&A activity

Ironically enough, the biggest jump in positive sentiment was in Asia, which is ground zero of the coronavirus outbreak. More than half of professionals there (53 percent) expected market growth, at an average of 10.4 percent (up from 2.4 percent last year).

In the Americas, more than half of respondents expected growth, at an average of 2.7 percent. EMEA respondents tended to be much more cautious about market growth, but the average anticipated rate was still 2.4 percent, up from a two percent decline in 2019.

Anticipated global M&A volume changes in 2020. COVID-19 bursts M&A activity optimism

Overall, the biggest risk factor for M&A volume was economic, cited by 69 percent  of respondents, and in particular ‘economic conditions’ (40 percent) and ‘slow down or recession’ (19 percent).

Economic uncertainty

Should COVID-19 continue to intensify, the OECD has warned it could halve global growth and lead to the weakest output since the global financial crisis.

As the origin of the outbreak, China is expected to be particularly hard hit. At the time of writing, global growth forecasts have been downgraded from 2.9 percent to 2.4 percent.

Meanwhile, the latest figures show that China-target M&A had halved by value, year-on-year, in the first part of the 2020, while Chinese outbound was down 85 percent, the lowest level since 2004.Factors that will impact M&A deal volume in 2020. COVID-19 bursts M&A activity optimism

Deal makers sentiment

There will certainly be some winners amid the chaos, but in the near-term we are likely to be faced with a flight to safety, reduced capital markets access and increased scrutiny of deal terms, in particular, material adverse change clauses.

The private equity industry, which is sitting on a cash pile in the trillions of dollars, may be one beneficiary of the drastic de-rating across global markets, but they will also have their hands-full managing existing portfolios.

For the first time in more than a decade, the sentiment and expectations of the world’s deal makers are being tested in the face of deep socio-economic uncertainty.

What's in store for 2020 global deal making? COVID-19 bursts M&A activity optimism

To find out more about the state of M&A and capital markets in 2020, download the report

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