COVID-19 to slow down M&A ecosystem, stall private equity deals

If we were to say that the coronavirus outbreak is a Lehman Brothers moment for the corporate world, it would be a gross understatement. The collapse of Lehman Brothers sent global capital markets into a deep-freeze mode, adversely impacting the capacities of the corporate sector to raise capital and drive capital expenditure. However, the crisis did not have a negative effect on the growth trajectories of countries like India, China and other emerging economies in South Asia and the Middle East.

However, the global health pandemic is much larger in size and scale and presents an exponential economic crisis, particularly for India and other developing economies. The global health challenge comes at a time when India is in the grips of overwhelming financial problems like the IL&FS crisis and Yes Bank and DHFL scams. Given that India has not emerged fully unscathed from these problems, any disruption in the form of disturbed consumption cycles and depleted supply chains would exert a definite negative impact on the country’s economy.

The crisis also brings to the fore a popular notion that when China sneezes, the world catches a cold. As China is the second-largest economy in the world and one of the largest global manufacturing hubs, any crisis emerging from the Asian economic giant is bound to impact global value chains and create prolonged economic adversities on a world scale.

Seen from a domestic perspective, with the financial markets going in a tailspin and a foreseeable reduction in interest rates, the ability to borrow will be severely restricted.

In layman’s terms, it can be stated that the Indian economy is entering a slowdown phase. In such a situation, the next 12 months remain crucial. As the enormity of COVID-19 gradually unfolds, we are bound to witness a change in mergers and acquisitions (M&A) transactions with deal pipelines largely limited to value buying and bargaining for cheap assets. We will witness the emergence of an M&A market scenario where non-sellers will become sellers.

Private Equity (PE) players will also find it difficult to navigate the present crisis. As risk perceptions increase substantially and diverse sectors undergo volatility swings, investors will need to take care and make informed investment decisions. The availability of growth-oriented capital is foreseen only when there will be an uptick in the acquisition of assets in the economy.

With a large number of companies anticipated to face margin pressures, numbers are also bound to nudge downward territory over the next two to three quarters. Even for the few industries which will report improved growth figures, it will become difficult to sustain the numbers over a longer timeframe.

In the near future, industry and trade dynamics in developing countries are likely to undergo structural adjustments. As we witness a long-term cascading effect across diverse sectors and industries, PE players will need to reassess their investment plans to mitigate risks and maximize returns.

In times of crisis of such magnitude, domestic consumer behavior is also bound to undergo a change. As COVID-19 spread fears of essential supplies and materials, consumers overstocked goods like sanitisers, soaps and food items. The resultant increase in purchase volumes will provide only transient benefits, the economy is likely to witness a demand contraction going ahead as consumers delay important buying decisions. With a gloomy sentiment pervading the economy, activities like property purchase or even buying essential items are likely to witness a huge hit. Retail industries like garments, entertainment, transport, travel, and tours are anticipated to witness a prolonged slowdown. Tour services sectors like retail trade, travel and tours, entertainment and even property purchase is likely to take a huge hit.

In an economy where key sectors are interlinked, corporate expansion plans are also likely to be stalled.

Source: The Week

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