5 minute read 15 Apr 2020
Has M&A come to a standstill due to COVID-19?

Has M&A come to a standstill due to COVID-19?

Authors

Marc Cosaert

EY Belgium M&A Partner

Passionate about entrepreneurship, growth and M&A. Dedicated husband and father. Loves mountain biking.

Els Degroote

EY Belgium M&A Partner

Passionate, deal-driven experienced M&A advisor with strong business development skills. Work hard, play hard.

Mark Sheikh

EY Belgium M&A Associate Partner

Experienced M&A professional, both buy- and sell-side, in BeNe. Well connected to the private equity segment. Particular experience in the temporary staffing sector.

5 minute read 15 Apr 2020

The corona crisis is having a significant impact on companies. Attention to the safety and protection of people is a priority, but can these special times also bring inspiration for the future?

One important conclusion from the EY Global Capital Confidence Barometer is that companies are only too well aware of the far-reaching consequences of the corona crisis. But this is also a time for companies to ask the right questions about their own organization. Riding out the crisis will certainly take time but there may also be opportunities along the way.

The EY Global Capital Confidence Barometer (pdf) is a recurring survey by EY. Every quarter, companies are asked about their feelings on the economy in general and the M&A market in particular. The most recent edition covers the first quarter of this year, when the corona crisis suddenly surfaced. An update of the questions was sent out which led to a result that takes into account the initial views on the impact of the crisis.

The overall conclusions

A first, and certainly not surprising, observation from the survey is that an overwhelming majority of the surveyed companies expect a serious impact of the corona crisis on both the economy and their own company. Moreover, about half expect a slow recovery lasting for the rest of 2020, and well into 2021. These respondents are usually large companies, often multinationals. Every week, EY also conducts a survey among about 80 Belgian medium-sized companies. This produces results that are also in line with what the GCCB shows. From 20 to 27 March, 80% of the companies claim to have been severely affected by the crisis. 70% expect a drop in turnover and 20% a regression of more than one quarter. The latest review on 7 April shows a somewhat more positive mood among these companies, given the recent prospect of possibly having the national pandemic under control.

A new paradigm

It is no exaggeration to describe this situation as a new paradigm. Companies are faced with a challenge but may have more opportunities than they realize. Recovery will depend on two very relevant factors: how long it will take to bring the health situation under control and how large and how effective will the impact of government intervention be? The latter especially concerns  real differences between countries. This complicates the estimation.

Companies are faced with a challenge, but may have more opportunities than they realize.

The list of priorities for companies

Businesses today work with, or should work with, a number of priorities. Apart from the humanitarian aspect being the top priority, focus on sufficient liquidity is extremely important. After all, this is indispensable to meet all obligations and may serve as a buffer to avoid bankruptcy. But company leaders also think ahead and dare to question things. Can we continue to deliver? Are the fundamentals of our business right? We may have to make strategic choices and divest activities, which in turn may generate much-needed liquidity. Also, it should be added that the differences are sometimes quite large, certainly between sectors.

Apart from the absolute priority for human and health aspects, the focus on sufficient liquidity is extremely important for companies.

The impact on decisions

When asked if the corona crisis is influencing decisions concerning the supply chain, 52% of respondents confirm. There seems also to be a clear impact in the field of automation (36%) and digital transformation (31%). A significant majority, 65%, also state that today they analyze their own strategy differently compared to three years ago. 72% think that these reviews should take place more often. The use of data also seems more and more to be considered a necessity. It is exactly in these turbulent times that this proactive awareness and the associated actions take on a special meaning.

M&A does not stand still

It would be a mistake to assume that, because of the corona crisis, M&A activities have suddenly come to a standstill. This is certainly not the case. The GCCB shows that almost a quarter of those questioned are only now beginning to see opportunities in the current situation. Nevertheless, the significant impact of the crisis cannot be ignored. Companies are holding off until the health crisis is under control, the volatility of prices has been contained – the results of the financial markets in recent weeks speak volumes – and the impact of the crisis can be fully understood. It is also important to know what position the banks will take with regard to acquisition financing. This is also an issue that will have to be clarified before steps to normalization can be taken.

The fact that it is extremely difficult to make M&A forecasts in the medium and long term does not mean that there are no positive expectations.

The impact on M&A is significant, but there is no downtime, at most a delay.

The potential in private equity

In the field, it is clear that auction processes usually are postponed. Buyers use the crisis to renegotiate their position. In some cases, get-out clauses are included in the event of a new crisis. It will take some time before the M&A market returns to normal. Nevertheless, this crisis situation also contains opportunities. Deals will definitely be made as a result of falling prices and companies ending up in financial difficulties. Private equity is finding its way also to these deals. Funds have raised a lot of money in recent years and this capital needs to be put to work in the existing portfolio or in new investments. Several companies will reorganize and focus on their core business and as a result, (are forced to) divest certain assets, which can again lead to interesting takeovers.

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Summary

The uncertainties arising from the corona crisis that we are currently experiencing call for far-reaching measures. Apart from the medical-human side, providing liquidity is the number one priority. But we also need long-term reflection. Forecasting is difficult, in particular for M&A and certainly in the short term.

It is clear that the consequences will be considerable, but it must also be kept in mind that there will be no standstill and at most a delay. At the same time, it also has to be acknowledged that from a private equity point of view, opportunities will certainly arise on the market.

About this article

Authors

Marc Cosaert

EY Belgium M&A Partner

Passionate about entrepreneurship, growth and M&A. Dedicated husband and father. Loves mountain biking.

Els Degroote

EY Belgium M&A Partner

Passionate, deal-driven experienced M&A advisor with strong business development skills. Work hard, play hard.

Mark Sheikh

EY Belgium M&A Associate Partner

Experienced M&A professional, both buy- and sell-side, in BeNe. Well connected to the private equity segment. Particular experience in the temporary staffing sector.