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Global M&As in Q2 Hit by Coronavirus: Trend Reversal Ahead?

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Deal making went for a toss in second-quarter 2020 as the coronavirus outbreak continued to wreak havoc, and the economy and business activities almost came to a grinding halt.

Per the data provided by Refinitiv, global M&As in the second quarter plunged to the lowest level in more than a decade. A total of around 8,200 deals were inked during the quarter,  the lowest quarterly number since third-quarter 2004.

During this period, deals worth $485.3 billion were announced, which tumbled 55% year over year. This figure is the lowest since third-quarter 2009. A more striking fact is that M&As plunged the most in the United States, with 85% fall from the prior-year level to $94 billion. Europe and Asia fared better, having witnessed a decline of less than 10%.

The companies are giving up expansion plans, while prioritizing on protecting/strengthening balance sheet and liquidity positions.

Furthermore, they are reluctant to go ahead with business transformation deals as there is still a lot of ambiguity over the actual impact of the outbreak on businesses and the economy. Thus, this has curtailed the ability of several companies to successfully initiate and complete M&A talks, with agreeing to a price being the biggest stumbling block.

Noteworthy Q2 Transactions

Of the announced deals, some of the biggest ones were from Europe, the Middle East and Africa.

In a landmark deal announced in early May, Telefonica SA (TEF - Free Report) and Liberty Global Plc agreed to merge their U.K. operations — O2 and Virgin Media — for £31.4 billion ($38.9 billion). Another notable one was National Commercial Bank, Saudi Arabia’s one of the largest lenders, agreeing to acquire Samba Financial Group for almost $16 billion.

Additionally, cross-border transactions were almost negligible. A notable one was the buyout of the U.S. peer Grubhub Inc. (GRUB - Free Report) by Europe’s food-ordering firm Just Eat Takeaway.com NV for $7.3 billion.

Notably, private equity firms were some of the most active dealmakers. With the industry having a record of $2.5 trillion in dry powder, firms including KKR & Co. Inc. and Blackstone were active in snapping up companies cheaper compared with the 2008 financial crisis.

Buyers Getting a Cold Feet

While the number of announced deals hit a low, there was a rise in termination of deals signed before the pandemic. More than 40 deals were terminated in the United States only. This is thrice the number withdrawn in first-quarter 2020.

In June, Simon Property Group Inc. (SPG - Free Report) announced that it will be suspending the deal to acquire Taubman Centers Inc. for $3.6 billion, citing the beating the retail sector took during the virus outbreak.

Also, Ally Financial Inc. (ALLY - Free Report) announced that the acquisition of CardWorks for $2.7 billion has been mutually called off owing to uncertainties related to the pandemic. Likewise, Texas Capital Bancshares (TCBI - Free Report) and Independent Bank Group mutually agreed to cancel the ‘merger of equals’ deal announced in December 2019.

Nonetheless, there are a few trying to renegotiate financial terms at a lower price. French luxury goods group, LVMH has been exploring ways to renegotiate the $16.2-billion takeover deal of U.S.-based Tiffany and Co. .

Road Ahead

A gradual revival of M&As is expected in the upcoming quarters.

However, with concerns related to the second wave of virus hitting the economy and stalling the reopening of operations, along with uncertainty related to the U.S. presidential elections, tough times are expected  ahead.

Nonetheless, valuations have dipped significantly for many companies affected by the coronavirus-related mayhem, making them attractive buyout choices. There are a few industries that are less adversely impacted than others and are ripe for consolidation like pharmaceuticals, biotechnology, food delivery and online-retail industries.

After losing out to buying Grubhub, Uber (UBER - Free Report) is planning to acquire food delivery start-up, Postmates.

It is still very early to decide how M&As are likely to fare going forward. But once the crisis abates, there is expected to be a wave of deals as the companies will try to regain lost footing by expanding through strategic acquisitions.

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