Global mergers and acquisitions plunged in April as companies worked through business challenges resulting from the coronavirus. Through April and the first part of May, the total value of announced deals was $207 billion, according to Bloomberg, beginning what is expected to be a year over year decline of more than 50% for the second quarter.
M&A has been brought to a halt as the pandemic hammers the global economy and upends the in-person meetings that are so critical to private negotiations between buyers and sellers.
Parts of the world are beginning to reopen their economies, but questions remain on how bad the aftertaste will be for corporate deal making. At its current pace – and many top economists warn of more financial pain if a second wave of infections emerges – the quarter would close with only 10,350 deals, with a total value of $621 billion, an RSM analysis of Bloomberg data found. That would be a 58% decline from the same time last year, the analysis found.
Some have argued that declining transaction volume resulted merely from a postponement of deals. A healthy backlog, the argument goes, has emerged, ripening the outlook for the third quarter and beyond, especially given the accommodative stimulus measures from the government and historically low interest rates.
And that’s true – deal making will no doubt pick up as the economy reopens and businesses can forecast their earnings with greater certainty. But when this happens is anyone’s guess. And many firms with available capital or healthy balance sheets will target companies with good bones that have suffered from the health crisis, and profits will eventually follow.
The long-term impact of the virus on consumer behavior is the major wild card in all of this. Even with a reopened economy it’s tough to tell what drag effect there may be on corporate results and M&A.
CEO Confidence Index
The U.S. CEO Confidence Index, a leading indicator of M&A optimism compiled by Chief Executive magazine, dropped only modestly, from 7.00 in February to 6.65 in April, a 5% decline. To put that in context, readings for the index below 2.0 were observed during the Great Recession, showing that many chief executives are holding on to hope that the virus will blow over. If the current reading goes lower, this will imply a reduced willingness to make deals and greater risks for deal execution.
The fear index
The inverse is true for the relationship between market volatility and M&A activity. The Chicago Board Options Exchange (VIX) is a measure of expected price fluctuations in the S&P 500 Index options over the next 30 days, and its recent readings provide cause for concern. It’s often termed the fear index, and it reached 53.54 and 34.15 for March 31 and April 30, respectively, representing a more than 160% increase from the same time last year. If we see continued volatility in the near term, this, too, may likely hinder deal making.
The takeaway
The future of M&A and the middle market hinges on the eradication of Covid-19. The biggest question that all companies and corporate deal makers will need to figure out is how consumer behavior will change after this health pandemic. Without customers, industries will not survive regardless of a government bailout.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
