M&A Outlook: Pent-up demand, prospects for a rebound

By: Russell Thomson, Trevear Thomas, and David Hoffman

It’s indisputable that the COVID-19 pandemic has dramatically curtailed mergers and acquisitions this year. The US $1,121 billion in deals in the first half of 2020 marked a 43 percent decline from the same period in 2019 and a 51 percent drop from 2018, according to Refinitiv data.¹ It appears likely the current environment will lead to a break in the six-year streak of deal activity above US $3 trillion annually.²

History shows, however, that after economic turmoil tamps down M&A, the rebound can be fast and steep. In this cycle, there’s every reason to believe that deal making may take off quickly again. As many have observed, large strategic buyers have ample cash for acquisitions, and financial buyers hold a record pool of dry powder available to deploy on deals. Some transactions that potential acquirers may have rejected 12 or 18 months ago as too expensive now appear possible. Deal strategies are being developed in response to recent, fundamental changes in the business environment. At Deloitte, we believe the pandemic—the stay-at-home orders, the economic impacts, the shifts in consumer behavior—is driving new ways of thinking about M&A (see “M&A and COVID-19: Charting new horizons”).

In our client interactions, we see potential buyers busy contemplating transactions, even if they are not quite ready to execute. The pent-up demand is significant, and that leads to the question of timing. We expect M&A markets may continue to struggle in the coming months, but we’re bullish on activity during the first half of 2021. We also acknowledge that no one can be certain when deal making will revive.

We believe it is better to try to understand what needs to happen to get a rebound going, focusing on the conditions that need to change. We anticipate three specific issues:

• Management bandwidth has been consumed by the initial responses to the pandemic and needs to be available before deals can start happening.
• The societal turmoil caused by the global spread of a deadly disease has created a disincentive to announcing deals.
• A shared understanding on price has not yet been found between buyers and sellers, and this, of course, is a necessity for transactions to get done.

Management bandwidth—As COVID-19 spread earlier this year, business leaders faced unprecedented challenges. They had to figure out how to keep employees and customers safe, address supply chain interruptions, and continue to get products and services to market, if possible. They had to do all of this while assessing the impact on finances and liquidity. Leadership wasn’t thinking about deals—and probably wasn’t taking meetings with the M&A team.

This issue has already begun to ease. While management challenges are still significant, the initial shock has passed. Even as the disease persists, or flares up in some locations, executives are beginning to turn to other topics, including deals that may be vitally important to longer-term success post-COVID.

Societal turmoil—When the globe is being shaken by a crisis and its attendant disruptions, including a staggering jump in unemployment, the public may look less favorably on mergers and acquisitions. Management understands that there’s headline risk—or a social media minefield to cross—and may be reluctant to announce deals. There can be brand damage when a transaction is announced and is not well received. On this issue, gaining some certainty about the outlook for the crisis can be a precursor to increased deal activity.

Price understanding—Following years of rising asset prices and strong M&A activity, many came into 2020 looking for a pricing reset. We clearly have one now, though no one would have wished for it to happen the way it has. And, whenever a downturn resets prices, it takes time for buyers and sellers to have a meeting of the minds. Potential buyers will likely be quick to believe there’s a new pricing regime, while sellers will likely be much slower to concede it.

This may take extra time to resolve in the current environment. There’s a wide range of views about how deep or long the economic hit from the pandemic will be. There’s also a range of opinion on how effective or long-lasting the fiscal and monetary efforts to support the economy and smooth the capital markets will be.

What to watch

The economic uncertainty resulting from the COVID-19 pandemic has impeded deal making, and while we anticipate M&A activity to increase as we emerge from this time of uncertainty, the timing depends on how quickly the economy rebounds. In the interim, many companies that are in financially vulnerable positions are taking measures such as optimizing their portfolios and selling distressed assets to safeguard their future. Companies that have been able to ride the upswing in demand for their services may turn to acquisitions to lay the groundwork to capture unassailable market leadership.

While M&A is set to be at the heart of recovery, the post-crisis M&A environment will be materially different. And although the timing for activity to fully rebound is uncertain, we can be certain that well-planned, bold moves will cement lasting industry leadership in the post-crisis world.

¹ Source: Based on Deloitte’s analysis of M&A data generated via the Refinitiv database on July 8, 2020.

² Source: Based on Deloitte’s analysis of M&A data generated via the Refinitiv database on July 28, 2020.