Deal makers began the year in optimistic mood, with the biggest cloud on the horizon being an unforeseen economic event. Now that those worst fears have been realized, how will COVID-19 impact M&A activity in 2020?
- The average predicted M&A growth rate in our deal makers survey had been 4.7 percent, prior to the COVID-19 impact on M&A activity.
- The Refinitiv annual Deal Makers Sentiment Survey found that the biggest jump in positive sentiment at the start of 2020 was in Asia.
- Deal makers now face reduced capital markets access and increased scrutiny on deal terms, including material adverse change clauses.
When the annual Deal Makers Sentiment Survey took place in the final weeks of 2019, M&A professionals within corporates proved to be the most bullish.
They told us they were expecting a market growth rate of 7.4 percent during 2020, compared with the 1.3 percent expected contraction for 2019.
However, there was always a risk of derailment. Of those same corporate respondents, 76 percent cited an “unforeseen economic event” as one of the most likely to influence deal making.
Three months into 2020, as COVID-19 spreads around the world, the question is now whether the fundamental drivers for M&A activity are strong enough to cope.
Watch: The Virus Effect on M&A — The Corona Correction
Without doubt, a coronavirus-free world was an optimistic place.
The proportion of deal makers expecting market growth had jumped from 38 percent to 47 percent, while market pessimists shrank from a quarter of respondents to just 11 percent.
The average predicted growth rate, from a sample of 457 deal makers, was a healthy 4.7 percent, compared with a 0.6 percent contraction in 2019.
Outlook for M&A activity
Ironically enough, the biggest jump in positive sentiment was in Asia, which is ground zero of the coronavirus outbreak. More than half of professionals there (53 percent) expected market growth, at an average of 10.4 percent (up from 2.4 percent last year).
In the Americas, more than half of respondents expected growth, at an average of 2.7 percent. EMEA respondents tended to be much more cautious about market growth, but the average anticipated rate was still 2.4 percent, up from a two percent decline in 2019.
Overall, the biggest risk factor for M&A volume was economic, cited by 69 percent of respondents, and in particular ‘economic conditions’ (40 percent) and ‘slow down or recession’ (19 percent).
Should COVID-19 continue to intensify, the OECD has warned it could halve global growth and lead to the weakest output since the global financial crisis.
As the origin of the outbreak, China is expected to be particularly hard hit. At the time of writing, global growth forecasts have been downgraded from 2.9 percent to 2.4 percent.
Meanwhile, the latest figures show that China-target M&A had halved by value, year-on-year, in the first part of the 2020, while Chinese outbound was down 85 percent, the lowest level since 2004.
Deal makers sentiment
There will certainly be some winners amid the chaos, but in the near-term we are likely to be faced with a flight to safety, reduced capital markets access and increased scrutiny of deal terms, in particular, material adverse change clauses.
The private equity industry, which is sitting on a cash pile in the trillions of dollars, may be one beneficiary of the drastic de-rating across global markets, but they will also have their hands-full managing existing portfolios.
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How to track the market developments:
The Corona Virus app in Eikon is your single destination to keep track on the key market moving headlines as well as the charts, data and impact analysis on the markets, sectors and commodities asset classes. If you’re an Eikon user, simply search for ‘Corona Virus’. If you’re not a user, get access now or switch to Eikon.
- Watch our unique series of video insights covering various sectors and asset classes. entitled the #CoronaCorrection Series, jointly produced with Real Vision.
- Follow our LinkedIn, Twitter and YouTube social media channel communities for the latest updates.
- Listen and review the webcast recording of our client webinar with Dr. Richard Peterson, MarketPysch’s CEO and Refinitiv’s Richard Goldman Market Development Director, Quant and Feeds, who presented Refinitiv’s research and insights on the current pandemic; reviewing the impact across different sectors in APAC.
- For more Refinitiv insights on the impact of Covid-19, go to refinitiv.com/covid
- Read about how the Coronavirus is impacting financial markets
- Find out why Refinitiv CEO, David Craig, believes that the Corona Correction is driven by data and not blind panic