The coronavirus (COVID-19) pandemic is causing a global crisis, which is having an international material force on mergers and acquisitions (M&A). Read our article on coronavirus’ impact M&A.
Coronavirus Impact: M&A
As lockdowns are imposed in most countries, transportation and travel have been restricted. Without the need to fuel cars, trucks, liners, and airplanes, energy demands have plummeted.
Demand for domestic electricity has increased as people are confined to their homes, but commercial use has dropped.
Oil has essentially become a semi-redundant source because of the economic slowdown. The demand has completely nosedived, and price wars have contributed to falling stocks.
Coronavirus Impact: M&A
In the first quarter of 2020, mergers and acquisitions fell by more than 50% compared to 2019 figures. Of those, many closed in January before the coronavirus outbreak spread worldwide and was officially declared a pandemic on March 11.
M&A activity is now at a near standstill.
Where executives were concentrating on mergers and acquisitions, their energy has since been diverted.
Companies have redirected their focus to their workforce to ensure staff health is the top priority. Secondary to that factor, businesses have pushed all their effort towards staying in business or loss limiting.
Longer-term goals of pursuing growth through acquisition strategies have been put on the side-line.
Many billion-dollar deals that were in the pipeline have collapsed, such as the Boeing Embraer deal, cancelled after coronavirus hit the industry hard.
The $4.2 billion Boeing Embraer merger deal was years in the making. Embraer was to sell 80% of its aviation unit to Boeing and become “Boeing Brasil – Commercial’.
The coronavirus pandemic has caused the aerospace industry to collapse, and demand for the production of new planes has been cut.
Boeing was under pressure to raise the cash and looked reluctant to pay the agreed $4.2 billion on a ‘product’ that had since lost market value.
Some industries have been disproportionately impacted by the economic crisis, like oil and gas, and travel and tourism.
Delays in M&A Deals
Deals that do survive the current economic crisis will likely be delayed, and timelines significantly extended. Getting executives in one room is an apparent reason, but buyers will be much more cautious when looking at finances and valuations.
Due diligence will be a primary delay factor – what extent have businesses been adversely impacted in terms of operations, finances, customers, employees, prospects, and suppliers.
Some changes have allowed for movement in the M&A industry. The FT reports, big mergers face delays as regulators adapt to pandemic:
“In the US, federal regulators have moved to accepting electronic filings instead of hard copies as their staff work from home, with the Department of Justice requesting a 30-day extension on some merger review deadlines and the Federal Trade Commission saying companies will not be fast-tracked even for deals that pose no issues”.
In March, the Justice Department’s antitrust division asked companies already under negotiations to extend merger reviews under final phases for an additional 30 days.
The move was initially proposed to allow more time for paperwork to be produced and reviewed, however, the move has threatened many high-profile mergers underway.
Experts lean toward a bearish market in the short term and a bullish market once the markets adjust to the new normal. High valuations will decrease, and favorable low-interest rates will boost access to borrowing from private and commercial lenders.
As the world comes back online, there will undoubtedly be many opportunities for good deals in these sectors. The current crisis will likely continue to influence the M&A world for the foreseeable future; buyers and sellers will need to adjust to the changing world. Businesses on both sides of the deal must minimize their exposure to the risks resulting from the pandemic.
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