Soon after the onset of the coronavirus pandemic — and the sharp economic contraction and stock market crash it caused — even already announced deals were in jeopardy. Some deals, such as Sycamore Partners’ plan to buy a majority stake in L Brands-owned Victoria’s Secret, fell apart.
As for new deals, would-be acquirers paused, not wanting to take on too much risk. Meanwhile, potential targets, seeing their stock values plunge, rushed to protect themselves from hostile bids by implementing poison pills.
But it wasn’t just the economic climate that made deal activity come to a halt. Shelter-in-place orders, which forced many employees to work-from-home, made deal-making seem logistically impossible. Meetings conducted on Zoom instead of in person seemed unlikely to help deal-making, not to mention the difficulty of conducting due diligence remotely.
That hesitancy is apparent in the numbers: data from Goldman Sachs showed that M&A activity at the conclusion of the second quarter was down 51% year-over-year.
But while many assumed that deal activity would cease for the year, well-positioned companies began to sense opportunities and act on them.
Colin Ryan, managing director at Goldman Sachs, says of the pickup in M&A activity we’ve seen over the past two months: “While we were seeing plenty of boards and companies focus on their balance sheet, we were also getting a lot of in bounds from companies saying, ‘OK now I’m in a position of strength. Now is my opportunity to make some waves. How soon can I start to enter dialogue from an M&A point of view?’”
Some of that opportunity dissipated when markets swiftly swung back from their March lows, providing fewer discounts for acquirers. But with interest already piqued and buyers realising that interest rates are likely to be lower for longer, companies have proven still been willing to make bids. There were seven deals announced since 1 July greater than $10bn each, according to Dealogic.
Some of those big deals include Teladoc Health agreeing to an $18.5bn merger with Livongo Health and Intercontinental Exchange, the owner of the New York Stock Exchange, buying Ellie Mae for $11bn from Thoma Bravo.
Some of the dynamics of deals have changed while markets remain uncertain. Namely, Ryan has been noticing that stock is increasingly being used to get deals done. The thinking on the companies’ side is: “Rather than having to make a decision to cash out today, why don’t we ride the upside together and pay a more modest premium in a stock deal, but you get to participate in the benefits of the consolidation,” Ryan says.
But these types of tie-ups only work when there’s familiarity on both sides of the transaction. Companies have been hesitant to engage with leadership teams they don’t know since meetings are taking place remotely. On the flip side, because some deals are happening with people who already know each other, the process has become even more efficient despite — or because of — travel restrictions.
“I think what you’re seeing right now is the M&A market is very strong because the people who are doing deals are doing them with people that they know,” Ryan said. “I think it is tougher to find that next deal where you’ve never met the CEO before.”
And deal activity is expected to remain robust for the rest of the year. The IPO market has also proven to be strong, which forces acquirers to consider a bid before companies go public to avoid the hurdles of acquiring publicly traded companies.
The election may also prove to be a catalyst as companies try to get ahead of whatever outcome they sense coming from the election — whether it be changes to taxes or regulation.
Ryan says: “We are certainly seeing owners ask the question, ‘Should I go out and seek liquidity? Even if I might forego a little price on the top end to get deals done in a tax efficient manner now, versus wait a year and find out that I may have gotten a higher headline price but I have to pay more in capital gains.”
One way or another, it’s proven not to be a boring year for M&A.
