M&A Insights H1 2020 Adjusting to adversity - Allen & Overy
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M&A
Insights
H1 2020
Adjusting
to adversity
allenovery.com
2 M&A Insights | H1 2020
Contents
A market utterly transformed
as M&A deals stall 04
Global M&A snapshot 06
Pipeline gaps and digital will
drive life sciences deals 08
Traditional retail faces
fight for survival 10
Fintech deals enter temporary
lull after Q1 surge 11
Global trends in private M&A:
Covid-19 update 12
Foreign direct investment controls
in the time of Covid-19 16
Global deal flows 18
U.S. M&A: the land of opportunity
meets challenges 19
European M&A set for tough autumn 23
China maintains
outward-looking approach 24
allenovery.com/mainsights 3
A market utterly transformed
as M&A deals stall
The Covid-19 coronavirus pandemic has brought the global M&A market to a
juddering halt and is likely to radically change dealmaking for the foreseeable future.
The figures for H1 make bleak reading: Q3 may well see these themes
intensify, especially with a severe
41 % – global deal value fell by 41%
recession in prospect.
– the number of transactions
And yet, there are reasons to believe
Decrease in global deal value declined by 16%
H1 2020 vs. H1 2019
that the M&A market will revive,
– megadeals over USD10 billion were although not to the level seen in the
down by 48%, while those over record-breaking last cycle, which
USD5bn were 25% lower began in early 2014.
This impact was particularly severe Reasons include:
16 % in Q2, as the crisis peaked.
– a likely rise in distressed deals
But even on a first-half basis it was and restructurings as vulnerable
Decrease in global deal volume dire, hitting all regions and sectors. businesses look for liquidity
H1 2020 vs. H1 2019
Domestic deals, which helped the – an upsurge in tech-related deals
market to keep ticking over in the latter as digital transformation accelerates
part of 2019, declined in value by 50% in sectors such as the life sciences,
and in number by 12%. retail and financial services
Cross-border deals continued their – the search for cost-efficiencies
Note: Figures in this report represent deals announced
between 1 January 2020 and 30 June 2020.
already steep decline, with deal value through collaborations, joint ventures
Data provided by
down 15% and volume 24% lower. and consolidations
This partly reflects the way investor There is one other vital factor.
confidence has been hit. Buyers (notably private equity funds)
have plenty of dry powder to deploy
“Safety first” is the watchword for most
and continue to assess opportunities,
businesses. The priority is to conserve
once buyer and seller price expectations
cash and protect revenue streams
line up. Credit markets also remain
rather than investing in M&A.
pretty robust.
Equally, it reflects the logistical
The market will revive, but will continue
difficulties of transacting in a
to look very different.
“locked-down” world. Megadeals
that are still completing are taking
an average of 300 days to close.
Last year, the average was 240 days.
4 M&A Insights | H1 2020
For more information, please contact:
David Broadley Dirk Meeus
Global Co-Head, Corporate/M&A Global Co-Head, Corporate/M&A
Tel +44 20 3088 3258 Tel +32 2780 2432
david.broadley@allenovery.com dirk.meeus@allenovery.com
allenovery.com/mainsights 5
Global M&A snapshot
Split of global M&A deals by value
30% 29% 16% 13%
Western Europe U.S. China APAC (excl. China)
Deal value: USD365bn Deal value: USD355bn Deal value: USD188bn Deal value: USD163bn
5% 4% 1% 0.26%
CEE and CIS MENA Latin America Sub-Saharan Africa
Deal value: USD56bn Deal value: USD46bn Deal value: USD11bn Deal value: USD3bn
% change from H1 2019
30%
Western Europe
69% U.S.
0%
China
8%
APAC (excl. China)
116%
CEE and CIS
60%
MENA
72%
Latin America
76%
Sub-Saharan Africa
6 M&A Insights | H1 2020
Global M&A activity by sector, H1 2020
Energy and Infrastructure
TMT
Financial Services
Consumer and Retail
Real Estate
Life Sciences
75
109
308
221
228
233
Value (USDbn)
% change from H1 2019
51% 38% 19% 24% 36% 79%
Energy and TMT Financial Consumer Real Estate Life Sciences
Infrastructure Services and Retail
allenovery.com/mainsights 7
Pipeline gaps and digital will
drive life sciences deals
Often seen as a safe haven sector in times of crisis, the life sciences have not only
been centre stage during the Covid-19 crisis but are riding it out well.
Life sciences megadeal volume Life sciences share prices are back Digital transformation accelerates
to 2019 levels, having fallen sharply
The lockdown has placed a huge
at the outset of the pandemic.
USD10bn+ However, transaction value and
volume have gone into reverse,
premium on technologies that
allow healthcare professionals and
their patients to interact remotely.
H1 2020: 0 falling by 79% and 15%, respectively. This steep rise in adoption seems
H1 2019: 8 Some key deals have been delayed, unlikely to be reversed, even once
including the planned merger of lockdown measures are eased
Pfizer and Mylan. globally. We also expect increased use
USD5bn+
of technology to optimise processes
The slowdown in deals looks particularly
and reduce costs. Diagnostics have
stark coming after a very strong 2019,
been one of the most active areas,
where the USD78bn Bristol Myers
H1 2020: 3 and we expect to see rapid adoption
Squib acquisition of Celgene became
H1 2019: 10 of key technologies, such as:
the ninth largest deal on record.
– AI/Big Data, not least in a bid to
R&D badly hit by the pandemic speed up drug discovery
The pandemic has seen many life – 3D printing
sciences companies go flat out to
– telemedicine
develop anti-viral tests and vaccines.
In wider consumer health, they Partnerships between pharma
have focused on safety equipment, companies and non-traditional industry
disinfectants and hand gels. players like big tech will be achieved
through M&A or other forms of alliance,
With key research staff redirected
with the pandemic speeding up
to this work, other R&D programmes
this trend.
have been badly hit and, in an effort
to protect participants from the Digital transformation will extend
Covid-19 coronavirus, clinical trials this deal activity for some time.
are at a near standstill. However, we may see more
collaborations rather than cash-driven
Companies could therefore face major
transactions due to lack of funding.
gaps in their R&D pipelines in future,
disrupting traditional funding models. In the shorter term, we could also
Filling the gaps could involve: see a spike in disputes over agreements
done in haste during the crisis,
– M&A
with companies testing Force Majeure
– consolidation deals and material adverse change clauses.
– strategic IP collaborations
and portfolio reshuffles,
driven by cost cutting
8 M&A Insights | H1 2020
“With key research staff redirected to
this work, other R&D programmes
have been badly hit and, in an effort
to protect participants from the virus,
clinical trials are at a near standstill.”
allenovery.com/mainsights 9
Traditional retail faces
fight for survival
Few sectors have been harder hit by the Covid-19 crisis than retail. With the exception
of pure online grocery retailers, there have been almost no winners from the pandemic.
Traditional retailers have been driven Retail’s rapid transition Full steam ahead for digitalisation
to close stores and furlough staff,
There will be no early let up. The crisis has sped up the digital
while desperately trying to preserve
transformation of retail by some five
cash. Big names have been forced into With recession looming in the autumn,
years, and this is where deal activity
administration and those with a poor many consumers are likely to rein
is likely to grow fastest, including:
online presence (or none at all) face a in spending or divert it to home and
fight for survival. healthcare products. The impact on – collaborations between tech
spending will grow as furloughing delivery platforms and bricks and
Big bricks and mortar supermarkets
ends and unemployment climbs. mortar retailers
have seen footfall drop dramatically
due to social distancing. In economies like Germany where – investment in key technologies
shops have already re-opened, such as AI, the Internet of Things
Even online clothing retailers have seen
consumers seem to be staying away, and drones
declining sales, with locked-down
with safety measures undermining
consumers losing their usual appetite – established brands teaming up with
the shopping experience they
for fast fashion. disruptive partners to communicate
once enjoyed.
environmental and social values
In this febrile environment, it is almost
Other likely trends include: to consumers online and through
impossible to value assets and the
social media
impact on transactions has been – faster decline of high streets,
profound as the crisis escalated. with retailers closing stores to – distressed deals, with financial buyers
Despite this, the numbers tell an focus on high-profile outlets where seeking buy and build opportunities,
interesting story: rents have been renegotiated pairing struggling brands with delivery
platforms to give them new life online
– H1 deal value increased by 24%, – a move by supermarkets away from
while volume fell by 21% convenience stores and back to big
edge-of-town sites, where shoppers
– Q2 transaction value increased
can visit less frequently but get wider
by 29%
choice under one roof
The increase in value is widely driven
– government measures to protect
by the USD81bn Unilever unification
food security and supply chains
transaction, which has boosted the
numbers during this uncertain period.
Consumer and Retail M&A activity, H1 2020
24%
Increase in deal value
21%
Decrease in deal volume
vs. H1 2019 vs. H1 2019
10 M&A Insights | H1 2020Fintech deals enter temporary
lull after Q1 surge
The start of the year saw a surge in ever-larger fintech deals around the world,
with every expectation that this trend would continue.
With valuations becoming increasingly However, given the current economic Activity likely to resume
inflated in Q1, we were beginning to outlook, fintechs’ (particularly early
The pandemic has sped up the
see financial institutions opting to build stage companies’) priorities are shifting,
adoption of online financial services,
their own fintech capabilities or enter with more businesses looking to hunker
even among previously reluctant
into collaborations, rather than buying down and ensure they have enough
consumers. Traditional institutions
promising tech companies outright. runway before their next funding round.
will need to respond to compete with
Changed dynamics Those deals that are done are likely to dedicated online challenger banks.
be opportunistic and we see evidence
The Covid-19 crisis has changed the In the medium term, that points
of that in the recent speculation about
dynamics. Dealmaking has entered a to a resurgence in strategic M&A
Metro Bank acquiring UK P2P lender,
lull, although one that looks temporary. transactions. Until then, investors
RateSetter or Western Union’s reported
Potential acquirers, including private are likely to be more cautious, with
approach to MoneyGram.
equity funds, are still assessing deals an emphasis on minority investing,
and doing the legwork, ready to move Some areas of the market remain consortium deals and collaborations.
quickly once the economic outlook particularly hot, not least the
becomes clearer. intersection between ecommerce
and payment systems.
Valuations are also coming down
and the impact of “down rounds” Facebook, for instance, is launching
is becoming increasingly relevant, payments services in a number of
with companies seeking equity markets. Alongside PayPal, Facebook
financing at valuations below also joined the latest funding round for
previous funding rounds. Gojek in Indonesia, securing a small
stake in GoPay.
Well-funded, more mature tech
companies are still in a position to buy.
Q1 standout deals included:
– Visa’s USD5.3bn acquisition of the start-up, Plaid
– LendingClub becoming the first fintech to buy a U.S.
regulated bank
– Worldline buying rival Ingenico for USD8.6bn
– The USD7bn purchase of Credit Karma/Intuit
allenovery.com/mainsights 11Global trends in private
M&A: Covid-19 update
Analysis of private M&A deals signed so far this year shows just how fundamentally
the market has changed since the onset of the Covid-19 crisis.
Over the last eight years, we have produced a special update comparing A number of auction processes still
analysed around 1,300 private M&A deals signed so far this year with those at an early stage saw competition
deals that Allen & Overy advised signed in 2019 and previous years. between bidders diminish almost
on globally. immediately, as doubts over valuations
Dramatic decline in
grew and as corporates refocused on
Usually, we report on M&A buy-side competition
cash preservation.
trends annually.
When the pandemic first hit, many deals
But the Covid-19 pandemic has close to signing went ahead, though
brought about such significant changes some in sectors that looked set to be
in market practice that we have badly affected were put on hold.
Deals conducted by auction
40% 41% 53% 46% 39%
2016 2017 2018 2019 2020
Highly competitive auctions
65% 55% 53% 45% 27%
2016 2017 2018 2019 2020
12 M&A Insights | H1 2020Deal structures changing with We already have some evidence Pre-Covid deals in heavily impacted
slight uptick in distressed M&A that deal structures are changing. sectors unravelling
This includes:
Many potential M&A investors have The vast majority of deals that were
been thinking about using deal – an increase in stake sales, including signed pre-Covid are proceeding as
structures that allow them to realise the minority investments expected. However, some in the most
benefits of M&A without full exposure to heavily impacted sectors (including
– some planned acquisitions being
the downside. retail, travel and tourism) are unravelling
turned into long-term collaborations
or being renegotiated.
In particular, parties are seeking to solve or supply arrangements
valuation issues, while also mitigating Some buyers are hoping that “material
– a slight uptick in distressed M&A,
solvency risk and, in some cases, adverse change” provisions will take
with more likely to follow
committing less funding. Just as in them out of deals, but many are also
the wake of the financial crisis, investors running an alternative argument: alleged
are debating whether to acquire, invest breaches of pre-closing “ordinary
or collaborate. course” covenants.
Deal structure
2019 2020
53% 100% 48%
share sale
Minority Investment: 45%
31% Stake sale 38% 50%+ Investment: 55%
16% Other 14%
allenovery.com/mainsights 132016 9%
In other deals, buyers are getting Certainty of funds is also critical, Many governments are introducing, or
2017 16%
creative when deal terms provide no and financing conditions have become increasing the scope of existing, foreign
Earn-out 19%
obvious get out. The outcomes of these even rarer. 2018 direct investment regimes,20%
fearing:
situations also vary, and some are still to
And termination rights linked to material – threats to national security
play out through litigation
80% or otherwise. 2019 9%
adverse change or material breach of
76% – loss of control over
But they point to areas of an M&A
73% warranty are scarcer than ever. 2020
critical infrastructure 19%
deal that might merit more focus70%
2016 One
9%surprise finding is that we have
during negotiations over the coming – the potential for opportunistic
not so far seen a coronavirus-related
months, particularly if a second wave of acquisitions, especially by buyers
2017 increase in the
Deferred 31%use
16%of reverse break
Covid-19 hits. affiliated with a foreign government
Earn-out 19% fees. But if more buyers refuse to
Sellers now have laser focus
2018 complete despite conditions20%having The pandemic is also impacting deal
on execution risk been satisfied, more sellers may start timetables, as the ability for some
2019 9%
pressing for these. authorities to conduct merger reviews
With sellers now focusing intently
has become more constrained.
on execution risk, a buyer able
2020
to Governments and regulators
19%
offer an unconditional deal will be at moving the goalposts This means it is taking longer than ever
an enormous advantage. In higher to close M&A deals.
Over the last few years, we have
value deals, where some degree of
Deferred 31% seen a swing towards protectionism, Long-stop periods in our 2020 deals
conditionality is almost inevitable,
particularly in the U.S. and Europe. ranged from one to 24 months, with an
substantive deal risk is being
Covid-19 has accelerated and average period of seven months. That
heavily scrutinised. By closing 50%
expanded that trend. is one month longer than the equivalent
period in 2019.
Earn-out 2016 2017 2018 2019 2020
Deferred consideration
By closing 50%
2016 2016 9% 9% 2016 11%
2017 2017 16%
16% 2017 11%
2018 20% 2018 10%
2018 20%
2019 9% 2019 15%
2019 9%
2020 19% 2020 31%
2020 19%
2020
Reason for earn-out Reason for deferred consideration
2016 11%
2017 11%
2018 10%
2019 15%
2020 31%
Bridge valuation gap 83% Payment contingent on future event 30%
Incentivise management 17% Vendor finance 30%
Security for warranty/indemnity claims 20%
Management retention 10%
Other 10%
14 M&A Insights | H1 2020Valuation challenges turn pricing increased, making dispute resolution Overall a nuanced picture
structures on their head mechanisms especially important at
There has been speculation that
the moment.
Companies have found it difficult to the short to medium-term economic
assess, with any certainty, what impact Significant movement in changes brought about by Covid-19
the pandemic will have on their future warranty packages might result in a shift to a fully-fledged
earnings. Without reliable financial buyer’s market for private M&A
Much market commentary has
projections, it is very hard to price a deal. deal terms. But the picture is far
suggested that buyers might
more nuanced.
Consequently, where deals are going succeed in obtaining stronger
ahead, parties are looking to pricing warranty and indemnity packages Buyers are focused primarily on the risk
structures that will help to mitigate risk in the current climate. of overpaying, and are mitigating that
and bridge valuation gaps. through new pricing structures.
But close analysis of our deals shows
In a marked increase on previous years: that, while most trade sellers are still Sellers are keenly focused on the risk of
providing a decent set of operational a failed deal, and are pushing back hard
– half our 2020 deals involved
warranties, they are pushing back on termination rights and unnecessary
an earn-out or deferred
hard on warranty repetition, buyer’s conditionality. They are also focused
consideration structure
awareness and liability caps. on contractual risk allocation, intent on
– half (excluding private equity exits) avoiding deal value being eroded as a
We have also seen a temporary reversal
involved a price adjustment result of significant future liabilities under
of the trend towards W&I insurance,
warranties and indemnities.
The financial metrics involved as underwriters seek to exclude liability
have changed too. related to the one issue that is currently
top of mind: Covid-19.
As a result of these “future pricing”
structures the risk of disputes has
Timing of payment
“Buyers are focused primarily on
the risk of overpaying, and are
2016 9%
mitigating that through new
2017 16%
Earn-out 19%
2018 20%
80%
76%
pricing structures.”
2019 9%
73% 2020 19%
70%
Deferred 31%
Elizabeth Wall Michael Parshall
Counsel & Head Know-How, Corporate Partner – Corporate
Tel +44 20 3088 3075 Tel +612 9373 7738
elizabeth.wall@allenovery.com michael.parshall@allenovery.com
By closing 50%
For a full briefing on our
survey of global trends
in private M&A during
the Covid-19 pandemic,
please talk to your
2016 2017 2018 2019 2020 usual A&O contact.
allenovery.com/mainsights 15
2016 11%Foreign direct investment controls
in the time of Covid-19
New measures to control foreign direct investment (FDI) have been unveiled around
the globe during the coronavirus crisis. Is this a new wave of protectionism under the
cover of Covid-19 or appropriate scrutiny in today’s world?
Many governments across the – statements by the European Impact on dealmaking
world have been tightening controls Commission urging all EU during the crisis
on FDI – typically on national security Member States to set up FDI review
Some of the measures that have
grounds – for some years now. procedures and to use them to the
been announced are Covid-specific,
Countries without FDI regimes are fullest extent, when a new EU regime
such as the new Australian regime.
catching up and introducing a comes into force in October
It has been provoked by fears that
legal framework, often as a matter
– reports that the EU will demand distressed companies will be taken
of urgency.
mandatory notification of any over during a moment of extreme
This trend has accelerated during the acquisition where the buyer is based vulnerability, perhaps with the loss of
coronavirus pandemic, raising concerns outside the EU and in receipt of companies considered vital to national
that we are entering a period of subsidies from its home state – economic or security interests.
growing protectionism and potentially a significant strengthening of its
However, the Australian government
greater political interference in position and a strategically different
has made it clear it does not want to
international M&A. stance from the much lighter-touch
discourage foreign investment and there
approach reflected in the framework
Actions and announcements, either is no evidence, yet, that the regime is
it set out last year
public or rumoured in recent months, slowing down processes unduly.
all confirm the game-changing, – strong indications that the long-awaited
The same is true in Japan.
accelerated approach to FDI. new and much more extensive control
These include: measures in the UK remain on the Despite China’s relatively strict FDI
cards, with a Bill to introduce them and foreign exchange regulatory
– a move by the U.S. Senate to prohibit
expected imminently control regimes, the great majority of
foreign state-controlled enterprises
inbound deals do get cleared by the
listing on American exchanges Although not all countries explicitly
Chinese authorities, at a time when the
single out a specific government as the
– continued enforcement by the government in China is signalling that it
key driver to increase the FDI regime,
Committee on Foreign Investment in wants to maintain an outward-looking
some do. Concerns around lack of
the U.S. (CFIUS), still the most active and international approach
symmetry or reciprocity is one key
regime in the world to investment.
concern, while some governments have
– emergency measures in Australia been particularly vocal on a perceived Indeed, that is the mood more widely
making all foreign takeover proposals, need to curtail Chinese investments in in Asia, where many governments want
no matter what the value or nature of some sectors. China, itself, of course, the region to remain open, particularly
the investment, subject to up to six continues to screen proposed as companies look to regionalise supply
months’ scrutiny inbound investment very vigorously. chains to make them more secure.
– Japan’s move to lower the threshold These are unsettling developments
for investigations into proposed for investors.
foreign takeovers of listed companies
16 M&A Insights | H1 2020“The pandemic has given more
and more governments a
licence to intervene to a degree
not seen in many decades.”
We have seen a continuing decline Interventionism on an Often governments demand a price for
in cross-border transactions globally. unprecedented scale such support. For instance, a bailed out
But this predates the crisis, even if airline might be asked to move faster in
With the exception of those
dealmaking has declined still further cutting its emissions. The EU’s recently
governments pursuing a clear
because of the logistical difficulties of published Recovery Plan has a powerful
protectionist agenda – of which
transacting in the current environment. environmental flavour to it.
the Trump administration is one –
China’s position is seventh in the the strengthening of FDI regimes In that environment, governments now
outbound acquirers’ league table, seems, in many cases, to be about have a springboard for much more
which resembles the position it held applying appropriate scrutiny rather intervention and that can be ad hoc
some five to ten years ago, despite the than out-and-out protectionism. and unpredictable.
sharp decline in investment into the U.S.
However, there is one noticeable The impact of this will be felt
because of the harsher CFIUS controls.
change, which has been exacerbated more broadly than just in the realm
However, the general reduction in
by the Covid-19 coronavirus crisis of FDI controls.
activity since the boom of two years
and is likely to persist as the world
ago is as much to do with China’s own Investors will need to get used to
hovers on the brink of what could be
controls on capital outflows as hostile operating in a much more politicised
a deep recession.
FDI regimes. and fragmented world with new
The pandemic has given more and regulatory challenges that can,
Still, there are significant practical
more governments a licence to and probably will, evolve. In this new
issues for investors to consider here.
intervene to a degree not seen in world, there are a number of new
Strengthened regimes are adding
many decades. rules to navigate. There are also new
a level of complexity to transactions,
opportunities to seize. Keeping up to
not least in competitive bid situations State mechanisms to support
date with the fast-moving changes in
where a buyer with no FDI hurdles to businesses through the crisis –
the global market will enable investors
jump through will clearly have the inside such as the provision of grants,
to stay ahead of the curve and make
lane in any race to buy an asset. loans, furlough schemes and even
the most of these opportunities.
partial renationalisation of vulnerable
companies – have risen on an
unprecedented scale and will
have a lasting effect.
Dominic Long Helga Van Peer François Renard Ken Rivlin Matthew Townsend
Partner – Corporate Antitrust Partner – Corporate Partner – Corporate Antitrust Partner – International Trade Partner – International Trade
Tel +44 20 3088 3626 Tel +32 2 780 24 67 Tel +852 2974 7110 and Regulatory Law and Regulatory Law
dominic.long@allenovery.com helga.vanpeer@allenovery.com françois.renard@allenovery.com Tel +1 212 610 6460 Tel +44 20 3088 3174
ken.rivlin@allenovery.com matthew.townsend@allenovery.com
allenovery.com/mainsights 17(2) France
237
(4) Germany
(6) Canada 322
(3) Japan 347
209
(10) China
172
(12) Singapore
(11) Hong Kong 212
Global deal flows
(-) Netherlands 139
98
(-) South Korea
121
(8) Australia
46
(13) Denmark
24
(-) Saudi Arabia
(7) Switzerland 160
Value of deals USDm
Number of deals 0 30,000 60,000 90,000 120,000 150,000
*(Position by deal value in H1 2019)
Inbound target markets, H1 2020
134
*(13) Netherlands
837
*(1) U.S.
*(5) Germany 305
442
*(2) UK
176
*(8) India
269
*(6) Mainland China
99
*(4) Switzerland
*(12) Spain 149
*(10) UAE 35
*(9) France 192
*(11) Australia 196
*(-) Italy 158
*(15) Hong Kong SAR 90
128
*(-) Singapore
*(-) Japan 82
0 30,000 60,000 90,000 120,000 150,000
Value (USDm)
Outbound acquirers, H1 2020
485
*(9) UK
1,031
*(1) U.S.
263
*(2) France
237
*(4) Germany
*(6) Canada 322
*(3) Japan 347
209
*(10) China
*(12) Singapore 172
*(11) Hong Kong 212
*(-) Netherlands 139
*(-) South Korea 98
*(8) Australia 121
46
*(13) Denmark
24
*(-) Saudi Arabia
*(7) Switzerland 160
0 30,000 60,000 90,000 120,000 150,000
Value (USDm)
18 M&A Insights | H1 2020U.S. M&A: the land of
opportunity meets challenges
The impact on U.S. transactions has been severe, with activity unlikely to recover until
market conditions stabilise. But opportunities are emerging for certain players.
U.S. market hits the brakes Elsewhere the effect has been even U.S. M&A activity,
more pronounced: H1 2020
The Covid-19 pandemic has had
a multitude of impacts on the U.S. – In travel and leisure, Mirae, the Korean
M&A market, presenting challenges asset manager, is attempting to pull
for parties at every stage of the deal out of buying a portfolio of luxury
process, including:
– valuation
hotels for USD5.8bn.
– In the fitness industry, Level 4 alleges
that CorePower is using the enforced
69%
Decrease in deal value
– access to and the terms of financing vs. H1 2019
closure of its facilities as a reason
– conducting due diligence to avoid purchasing a number of
yoga studios.
– obtaining regulatory approvals and
third party consents – In retail, where lockdowns became
9%
widespread and consumer confidence
– complying with pre-completion
dried up virtually overnight, Sycamore
covenants
Partners cited numerous breaches of
We have seen buyers seek to avoid the purchase agreement due to store Decrease in deal volume
completing high-profile transactions vs. H1 2019
closures and employee furloughs to
while sellers have filed suit trying to claim it no longer had to buy Victoria’s
force them to do so. Secret. L Brands has since let the
buyer walk away.
High-profile deals fall through
Few industries have been immune,
with both strategic and private equity
It will take time for court cases to play
out. The threshold in U.S. courts for
29%
U.S. market share
establishing material adverse effect
players affected. of global M&A
and the exceptions related to general
– In the technology sector, Xerox economic impacts (including some
terminated its USD34bn hostile bid specific references to pandemics) is
for HP at the end of March, having high. So many of these cases may
previously raised its bid. hinge on “ordinary course of business”
covenants, which require:
– In cybersecurity, Advent International
tried to terminate its agreement to – target companies to operate in the
take Forescout Technologies private. ordinary course of business between
signing and closing
– that certain actions may not be taken
without the buyer’s consent
allenovery.com/mainsights 19In addition, there are complexities. Other deals stay the course A golden opportunity for some
Target companies forced to shutter
While numerous potential deals Despite the widespread disruption,
or significantly cut back their businesses
have been shelved, we have seen new opportunities are emerging
may, arguably, not be operating in the
agreements signed before the crisis for those who can deploy
ordinary course of business. However,
took hold continue to completion. resources and capitalise on
they can counter claim that they are
For example: reduced company valuations.
complying with other pre-completion
covenants, including abiding by any – Greif, Inc., a global leader in industrial For private equity firms, many
laws or government directives, which packaging, completed the sale of its armed with record amounts of cash,
drove many of their actions. Consumer Packaging Group business Private Investment in Public Equity
in April (PIPE) transactions are on the rise.
The outcome of these cases will likely
Competition here is so fierce that
depend on how courts seek to compare – Xperi completed its merger with TiVo
processes are often being run like M&A
the conduct of each business. They
– State Grid International Development auctions, with multiple firms vying for a
may, for instance:
is on track to acquire Sempra piece of the most desirable companies.
– use the way other businesses in Energy’s Chilean business by the
PIPE transactions often increase when
the sector have acted during the end of June
uncertainty plagues traditional financial
pandemic as a measure
Notably, many of the completed markets. It happened during the 2008
– look at how the specific business transactions have involved strategic financial crisis, as well.
has operated historically acquisitions between companies in the
Dramatically decreased stock prices
same sector, facing similar economic
– take into account the length of in travel, retail and entertainment
prospects.
the pandemic companies are also providing
opportunities for investors.
– assess how quickly the business
can recover These deals are often in the form of
an investment rather than a takeover,
– consider whether the parties
allowing the buyer to acquire a large
have acted and communicated
stake at a discount and the target to
in good faith
raise cash quickly. Recent deals include
Wayfair’s private equity-led raising of
USD535 million, and preferred stock
issuances by Cheesecake Factory
(USD200m) and Expedia (USD1.1bn).
20 M&A Insights | H1 2020“Despite the pandemic
throwing many deals off
course, new opportunities
are emerging for those who
can deploy resources to
capitalise on reduced public
company valuations.”
Post-pandemic landscape
Despite ongoing public health concerns,
high rates of unemployment and
decreased consumer confidence,
equity markets have stabilised in recent
weeks, largely due to massive federal
government stimulus programmes.
However, M&A activity has been
slower to rebound due to continued
concerns about underlying economic
and social conditions.
Though anecdotal evidence suggests
certain players, particularly private
equity, are quietly gearing up for a
spurt of deal activity, a sustained and
distributed recovery depends on a
variety of factors. These include the
stabilisation of valuations (at levels
where buyers and sellers can agree),
financial market conditions and, most
importantly, evidence that the market is
returning to growth.
allenovery.com/mainsights 2122 M&A Insights | H1 2020
European M&A set for
tough autumn
European M&A markets performed more strongly than expected in H1,
buoyed by a small number of very big transactions. However, the underlying
picture was far less rosy, and the short-term outlook is uncertain.
Western Europe M&A activity, Deal value in Western Europe rose by Safety first for investors
H1 2020 30%. However, a steep 29% decline in
The pandemic has forced nervous
deal volume, perhaps, provides a more
investors to take a “safety first”
accurate picture of underlying activity.
approach and has left businesses
Big transactions that did complete focused primarily on conserving
30%
were, generally, well advanced cash rather than M&A.
before the Covid-19 pandemic took
Deals are getting done. With share
hold or had to be completed for
Increase in value prices recovering, potential public deals
strategic reasons.
vs. H1 2019 are under review. Well-funded private
That is true of Thermo Fisher’s equity houses also continue to assess
USD11.5bn acquisition of Qiagen. significant “take-private” deals,
Even more so for ThyssenKrupp’s when prices stabilise.
EUR17.2bn sale of its lift business to
Targets with business plans that
29%
an investor group, led by Advent and
remain viable are still attracting
Cinven. Without a deal, the group
attention, notably in the healthcare
would be in severe financial difficulties.
Decrease in volume and technology sectors.
vs. H1 2019 The GBP31bn merger of Virgin Media
More fragile sectors – such as
and O2 in the UK reflects the continuing
aviation, leisure, hotels, travel and
rapid convergence of mobile, fixed
automotive supply – are off the radar.
broadband and entertainment services.
However, we could see consolidation
Placing a value on the alliance was and distressed deals, and, in some
made easier since it was free of any cases, government intervention in
cash element. More widely, valuing these areas.
assets has become difficult given
the uncertain economic outlook. An uncertain outlook
It will take time for M&A activity to revive
and Q3 is likely to be a tough one, with
investor confidence remaining subdued.
“It will take time for M&A That is even more likely with major
political uncertainty hanging over
activity to revive and Q3 is likely future trading plans and the need to
reconfigure supply chains.
to be a tough one, with investor Most businesses are now banking
on a hard Brexit, given the lack of
confidence remaining subdued.” progress in the EU/UK trade talks
as the end-of-year deadline looms.
This will prolong uncertainty.
allenovery.com/mainsights 23China maintains
outward-looking approach
The Covid-19 crisis has slowed Chinese deal activity. Activity remains sluggish even
though the country is emerging from the crisis earlier than the rest of the world.
– While deal value for China was Deals in strategic sectors designed to Open to inbound investors
stable in H1, with a 0% change, upscale and bring new technologies
China continues to ease restrictions
volume fell 13%. to Chinese industries are expected to
on inbound investment.
continue, such as those targeting:
– The picture was worse for outbound
Regulations governing the
deals, with value and volume down – Technologies
pharmaceutical sector, for instance,
by 26% and 25%, respectively.
– Renewable energy have been modernised and we are
seeing strong activity here. The clean
– Infrastructure
Despite tougher controls on FDI in energy and infrastructure sectors also
many countries, it is expected that – Advanced manufacturing technologies remain active.
China will continue, as part of its
– Biotech and healthcare Multinational companies that no longer
ongoing strategy, its international
see China as a cost-effective base are
and outward-looking approach to The need to raise additional capital
making an exit, in a trend accelerated
outbound and inbound M&A. could also see a growth in international
by the crisis.
fundraising; for instance through
With the economy shrinking for the first
cross-border listings. One example However, those wanting a stronger
time in decades (GDP fell by 6.8% in
is the Shanghai-London Stock presence in China are finding it an
Q1), strategic M&A transactions will play
Connect programme. increasingly investor-friendly market.
an important part in the recovery.
But outbound investors face a range
That seemed to be the message from
of hurdles, alongside tougher FDI
May’s National People’s Congress, China top three target markets
controls that have been erected
where the government did not publish (H1 2020)
by other countries.
a target for GDP growth.
Increased competition for assets, USD5.1bn
In part, that reflects deep uncertainty
particularly from nimble and well-funded 52
about how quickly the Chinese
private equity funds, will require buyers
domestic economy can return to normal
to be more flexible over pricing and
and where the global economy is going.
deal terms.
It also indicates that China wants to
avoid the often speculative investment As the bitter trade standoff with the
boom following the financial crisis. U.S. continues – exemplified by the USD2.8bn
battle over Huawei’s involvement in
Support for strategic outbound deals western 5G networks – Chinese buyers 21
also face the task of building trust in
China is likely to back sensible overseas markets. USD857m
outbound investments in key
jurisdictions and sectors, not least 11
as part of the ongoing Belt and
Road initiative. China will be much
more careful in how it describes its U.S. Hong Kong SAR Singapore
engagement with both the developing
and developed world.
Value of deals USD
Number of deals
24 M&A Insights | H1 2020GLOBAL PRESENCE
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