M&A predictions in a post COVID-19 world: Europe edition – Analysis

20 May 2020

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, according to Mergermarket analytics.

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, according to Mergermarket analytics.


However, there are early indications as to where M&A activity could start to pick-up, with some pockets of resistance in certain sectors such as tech and healthcare. There are also signs that countries which have managed to control the virus, such as Germany, are in a more advantageous position.


Projection Graph


Dealmaking activity has already started to see a significant downturn, with figures in April (EUR 19.7bn, 222 deals) accounting for the lowest monthly value since 2009. “This is a completely different kind of shock to the last financial crisis”, a head of M&A at a European bank said. “A complete shutdown of the economic system has never been seen before”.


As firms evaluate the supply chain impact and re-purpose products and services to meet new demands, “M&A is taking a back-seat for now,” Ben Higson, head of Hogan Lovells’ corporate practice in London said. But the current situation could see an “acceleration of corporate re-organisations”, Higson added, 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.


Meanwhile, valuations remain particularly challenging given the immediate impact to certain sectors. Firms may need to explore alternative transaction structures, with the use of earn-outs and more accounts-based price adjustment mechanisms a possibility going forward, Higson said.


Private Equity Graph


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 EUR 57.5bn so far this year, following takeovers of Thyssenkrupp elevators and iQ Student Accommodation, yet just EUR 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 the European banker.



Cross-Border Graph


Cross-border M&A is likely to remain subdued in the coming months, given the extra complexity in coordinating such transactions. 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 has pushed the 2020 figure (EUR 123.8bn, 851 deals) 8% lower by value than YTD 2019 (EUR 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.


While travel restrictions will not affect the drawing up of contracts, it may impact the ability of a buyer to understand a seller’s business, according to Higson. The due diligence of tangible assets on the ground may not be possible in the current circumstances, for example, and so more reliance on independent expertise and transparency from the seller may be required, he added.


Higson also raised concerns parties may have when conducting large-scale cross-border transactions, given the amount of time needed to close such a transaction and potential delays in regulatory approval processes.




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 the European banker.


Early indications show that countries such as Germany, which has not been as badly affected by the pandemic as others, may see a smaller fall in activity. 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.


The pandemic will continue to affect dealmaking logistics, according to Mergermarket intelligence, as M&A professionals get to grips with their new reality.



Tech Graph


Tech, business services and healthcare appear likely to see continued activity despite the global slowdown in dealmaking, with sectors more resilient to the crisis such as payment services and renewables named by the European banker as key areas to watch.


In 2019, European tech M&A reached its highest annual value and volume on Mergermarket record, with a total of EUR 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%.


Several ongoing processes involving tech assets remain live, including Melchers’ potential sale of cloud services specialist IGEL Technology, while US sponsors are reportedly interested in automation software developer Eggplant Software. Meanwhile, eBay are reportedly in talks to sell its European classifieds division, with several private equity players circling.


Oliver Haarmann, founder partner of Searchlight Capital Partners described how in recent years, the firm has begun to focus on B2B companies with recurring revenues. This is likely to continue going forward given these areas are likely to be insulated from pressures seen by consumer-facing businesses.


Healthcare meanwhile has long been a sector of interest to private equity firms, according to Martin Henrichs, head of healthcare investment banking at UBS, with a particular focus on healthcare services and medtech.

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