COVID-19 has not only inflicted a significant economic cost, but also a major human one, which should be neither forgotten nor ignored. Yet the impact on businesses around the world is stark and a source of concern as the crisis continues unabated.

During the initial wave of COVID-19 and subsequent lockdown, the M&A market saw a 90% drop in activity from the previous year1, translating to a reduction in deal value in the hundreds of billions. While this may not come as a surprise to many due to the uncertainty within the market, the flow-on effects were being felt by entire industries surrounding M&A.

As restrictions eased and the economy was encouraged to return to a new normal, so too did the M&A market. There has been a huge growth in terms of both the number and size of deals. We believe this growth will be exponential as the industry becomes accustomed to operating in this new environment and companies can no longer afford to stand still.

There are numerous reasons why we are seeing the deal market return to form. These include shareholders demanding returns, previously buoyant businesses requiring funding, companies looking for strategic investments and a whole tranche of sectors hitting difficulties. So, what does this mean for you?

Shareholders demanding returns

As the world’s largest publicly traded private equity firm, Blackstone oversees $560bn of assets. In the second quarter of this year, the firm reported an inflow of a further $20bn to bring its dry powder to over $150bn.2

Why is money still flowing in? Pension funds, sovereign wealth funds and college endowments – to name a few, all need private equity firms to manage their investments. Therefore, private equity firms need to use this cash to grow their portfolio and make returns for their investors before they go elsewhere. For this reason alone, we expect to see a huge ramp-up in deals.

Strategic investments

There have been industry winners and losers as a result of the economic turmoil of the past six months. Companies such as Zoom, Amazon and Ocado have seen a sustained increase in demand for their products and services. In general, tech, large online retail and pharma companies have either been growing or seen limited impacts of the crisis.

Elsewhere, company management teams have been focused on survival and understanding the impact of the crisis on their customers, employees and supply chains. It’s only now that they’re able to begin looking to the future. The investments they now make will be strategic, either to grow their pipeline, move into strategically aligned areas or through opportunities to buy competitors and grow their market share. For example, multinational tech company NVIDIA recently acquired Arm Limited for $40bn, combining NVIDIA’s artificial intelligence computing platform with Arm’s vast ecosystem.3

Consolidation

We expect to see significant consolidation in some of the hardest-hit industries including travel, automobile and the entertainment sector over the coming months. Private firms are likely to use their own reserves, capital funding or government bailout schemes first, but as these routes run dry, companies may be forced to seek outside investors to shore up their finances. Restaurants, airlines and other industries that require more than six people to gather in a confined space, as per current UK Government guidelines, are at the greatest risk. Future Government restrictions may well continue to lower capacity and demand.

The future of M&A

What does this mean for the future of the M&A market in general? Quarters three and four are likely to see considerable growth. Many large deals have already been announced, including Oracle’s bid for Tik Tok4 and Gilead Sciences’ $20bn deal to buy Immunomedics5.

Beyond this, there is little certainty around what the future holds. In the past six months, restrictions have come and gone, and the economy has been in hibernation. The looming US election and the potential reintroduction of lockdown across Europe are macroeconomic events that could, again, quickly change things on the ground.

One thing that’s certain is that companies can no longer afford to sit on their hands. Instead, expect to see the green shoots of recovery begin to bear fruit, although how sweet that fruit will be remains to be seen.

At Gate One, we are M&A post-deal integration and separation specialists. We support strategically important initiatives that make a difference. Transformation is our heartland. We have supported a number of significant turnarounds, mergers, acquisitions and divestments. Our core capability offerings include deal governance; day one readiness; post-merger integration; post-deal separation; operating model design; TSA management; cultural blueprint and integration planning.

Get in touch to see how we can help you navigate your next M&A challenge.

ALEX SHAFIER | PRINCIPAL

Alex is a highly accomplished digital transformation programme manager and IT integration specialist, with over ten years’ experience supporting businesses with complex, high profile change programmes. Previously with one of the big four firms, he has a great breadth of experience having worked with clients in sectors including life sciences, travel and financial services.