Opinion

What impact has COVID-19 had on M&A activity?

Published: 15th July 2020
Area: Corporate & Commercial

What impact has COVID-19 had on M&A activity?

Prior to the lockdown, M&A activity in the UK was looking healthy, with the ‘Boris-bounce’ encouraging businesses to make big investments once more. Brexit was done, political stability had returned to some degree, and the risks surrounding deal-making had reduced.

Overall, there was plenty to be optimistic about: liquidity in the financial markets and banks with private equity holding plenty of financial fire power. Good assets were in demand from trade buyers and private equity, which was leading to prices being chased higher. However, these feelings of security were swiftly removed once COVID-19 began to spread, causing organisations to revaluate their priorities. So, what does the future look like for M&A?

What happened to M&As when lockdown began?

Many businesses reacted to lockdown by implementing steps to preserve cash, so it was inevitable that many deals were pulled by buyers or their financiers. However, the impact of lockdown is not spread evenly across all businesses; some sectors, such as food and drink have thrived, whereas others have been unaffected, for example, energy and renewables, and some technology businesses.

There has also been continuing investment activity into innovative MedTech businesses, with those who are investing in the future notably more willing to look through the trading issues arising from lockdown.

What about deal-making post lockdown?

Optimists hope that deals on hold will be dusted off and rapidly implemented. However, there’s always a risk that buyers will look at the hole in profits created during lockdown and decide either to wait for a longer period of more positive trading or a price adjustment.

Even now, before the lockdown has ended, businesses with cash reserves will be in a strong position. As a result, they may decide to seize the opportunity to make strategic acquisitions as their less financially healthy competitors suffer or even go into administration.

What could the post-lockdown environment look like?

In any period of change there will be uncertainty and hesitation, but change also brings opportunity. For the well-resourced and brave, there will be the chance to accelerate growth plans by making strategic or even opportunistic acquisitions at prices well below what would have been achieved before 2020.

Interest rates should remain low, with the Bank of England and the Government flooding the market with liquidity. Providing, of course, that the extra liquidity doesn’t lead to inflation, the post-lockdown landscape should be vastly different to the 2009 financial crash, where financial markets dried up completely.

However, if inflation does return, the question is: are businesses and advisers prepared to enter a high inflation/high interest rate environment?

The pandemic may have put a stop to some M&A activity, but for those in a stable financial position, it has also created opportunity. Nevertheless, it may be a while before UK deal-making returns to the heady heights it was at pre-lockdown.

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