European M&A looks set to remain at historically low levels through 2020 with a recovery unlikely until mid-2021, as the world continues to grapple with the coronavirus pandemic and its economic consequences.
Dealmaking activity has already started to see a significant downturn, with figures in April (€19.7bn, 222 deals) accounting for the lowest monthly value since 2009. However, there are early indications as to where M&A activity could start to pick-up, including these 5 trends:
1. M&A unlikely to be short-term priority for corporates but could see rise in carve-outs and divestments
As firms evaluate the supply chain impact and re-purpose products and services to meet new demands, M&A might not be an immediate priority. But the current situation could see an “acceleration of corporate re-organisations” according to one expert, while it could also encourage smaller bolt-on acquisitions and divestments.
Corporate carve-outs and divestitures have been a growing trend in recent years, with large corporates increasingly focusing on core products and services, spending on tech to fight back against smaller, more nimble competition.
2. Private equity could move quickly to deploy dry powder once situation improves
Following a strong opening to the year, the number of buyouts has taken a similar downturn in recent weeks. Buyouts have reached a total of €57.5bn so far this year, following takeovers of Thyssenkrupp elevators and iQ Student Accommodation, yet just €3.4bn was spent by private equity firms in Europe in April.
Private equity deals have also fallen as sponsors assess how their portfolio companies are being impacted. Given the levels of dry-powder available, they could be one of the first movers when the situation reopens, according to a European banker.
3. Cross-border M&A is likely to remain subdued in coming months
In 2009, cross-border M&A with a European target plummeted 77.1% in comparison to the highs of 2007. Despite strong activity prior to the outbreak, the pandemic has pushed the 2020 figure (€123.8bn, 851 deals) 8% lower by value than YTD 2019 (€134.6bn, 1,320 deals). Given the current trajectory in recent weeks, dealmaking could fall towards the level seen between 2010 and 2013 by the end of the year.
4. Countries such as Germany, which haven’t been as badly affected by the pandemic, may see a smaller fall in activity
One major impact on M&A going forward will be when each country moves onto the next phase of its recovery process and begins to open up its economy again, according to one expert. Germany accounted for 18% of European deals announced in April, compared to 12.4% across 2019.
Following a number of strong years, German private equity activity has remained robust in 2020, even in recent weeks. In April, 12 buyouts of German firms were announced, in line with figures seen during the first quarter of the year.
5. Tech sector likely to see continued activity despite global slowdown in dealmaking
In 2019, European tech M&A reached its highest annual value and volume on Mergermarket record, with a total of €64bn spent across 1,137 deals. The sector’s share of total European M&A has similarly been experiencing a noticeable uptick in recent years, with corporates and sponsors alike investing in innovative assets. Tech accounted for 14.2% of the European deal count in 2019, with a further jump so far this year to 17.7%.
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