Is COVID-19 Driving the New Normal in M&A?

Corporate merger and acquisition activity is taking a big hit from the economic uncertainty wrought by COVID-19. Companies are reassessing their priorities and bracing for an extended period of turbulence. At NTT DATA Services, we believe that appropriate emphasis on planning, diligence, and a realizable integration plan can help counter many M&A risks inherent in this environment, enabling companies to use M&A as a key tool to transform businesses. And, this is exactly the kind of transformation many businesses will need to do to prosper during and after this COVID-19 cycle.

COVID-19 has introduced significant change in M&A activity
The COVID-19 pandemic has added unprecedented risk, complexity and uncertainty to M&A execution. At the beginning of the pandemic, Forbes reported a dramatic drop in activity, with a 25% decrease in value worldwide and a 50% decrease in the US. Certain sectors, which are awash in cash, have seen growth in the number of deals, while there has been a significant drop in the number and value of deals in other sectors. In the fourth quarter alone, deal value was up in technology and consumer and retail sectors, and down in energy and infrastructure, financial services, real estate, and life sciences, according to M&A attorneys Allen & Overy.

While there has been an overall drop in the volume of large transformational strategic deals, there has been an uptick in the mid-tier market. Private equity firms and corporate investors with cash reserves are absorbing smaller technology companies and companies with product adjacencies. These bite-sized acquisitions are driven by the need to consolidate operations due to synergies or acquire new technology and talent.

In Life Sciences, where companies are less exposed to liquidity issues, the COVID-19 fallout is creating new opportunities for virology, supply chain, partnering, and virtual healthcare, resulting in a wave of M&A in these areas. On the other hand, manufacturing has been impacted by supply shocks with a buildup of inventory due to reduced sales related to the pandemic, and trade restrictions and compliance obligations have further dampened M&A demand.

Corporate cash has grown substantially over the past decade. Profits were generally up until the COVID-19 crisis. While spending on tangible assets has tapered off, a greater percentage of investment has shifted to intangible assets. Distressed properties are being put on a fire sale as companies are looking at opportunities to divest non-core or low-performing businesses to release cash for turnaround or acquisition activity.

Disruption creates new avenues for growth
At NTT DATA Services, we see a way through this volatility. Strategically focused companies can challenge the status quo and disrupt stagnant thinking by using mergers and acquisitions to create new avenues for significant growth, shareholder value, and competitive advantage. With the low cost of capital, there is an expectation that we will start to see an uptick in debt and equity deals. The M&A recovery that started in second half of 2020 will accelerate in 2021. SPAC (Special Purpose Acquisition Companies) deals will continue to grow, and private equity is well-positioned with over 1.4 T in dry powder to drive acquisitions. Those who know how to assess opportunity and are in a position to venture in will prosper. In our last global financial crisis, from 2007 through 2009, companies that continued M&A activity significantly outperformed those who did not.

Watch this space
As part of an on-going series on M&A, we plan to cover what CxOs need to consider to prioritize and adapt their acquisition procedures and a look at the future. The series concludes by covering the benefits of a cloud-first integration model. Stay tuned.