The Historic M&A Slowdown

Global Mergers and Acquisitions Drop by 50%

During the second quarter of 2020, which ended Tuesday, mergers and acquisitions declined significantly. Globally, companies only made $485 billion worth of deals. Over the course of the same period last year, nearly $1 trillion worth of mergers and acquisitions took place—meaning there was a decline of almost 50%. In the US, the year-over-year decline was nearly 90%.

With the economy reeling due to the spread of coronavirus, there was far less liquidity in the financial markets. Rather than expanding through mergers and acquisitions, companies had to focus on saving their existing businesses and finding back-up credit lines instead.

Private Equity Companies Stayed Active

Private equity firms managed to make more deals last quarter than other companies. The sector accounted for 16% of M&A activity, which is the highest percentage of deals PE firms have been responsible for since 2007.

When the quarter began, the private equity industry had $2.5 trillion in capital from investors to spend. Some PE firms look back on the 2008 financial crash with regrets about not investing more boldly when companies were discounted. As a result, some PE companies are hunting for deals more aggressively now. For example, KKR (KKR) recently bought Viridor, a UK-based recycling company, for $5.23 billion. KKR also partnered with Providence Equity Partners and Cinven to acquire Masmovil, a Spanish telecom operator, for $5.6 billion.

Looking Ahead

Companies face an uncertain future with questions looming about a second wave of COVID-19 infections and the US presidential election. However, most analysts are optimistic that, despite the many unknowns, mergers and acquisitions will come trickling back.

The food delivery industry is already seeing activity and could lead the way for mergers and acquisitions in other sectors. In June, Netherlands-based JustEatTakeaway.com (TKAYY) bought Grubhub (GRUB) for $7.3 billion. Currently, Uber (UBER) is in talks about acquiring Postmates. Analysts also expect to see mergers in the biotechnology and pharmaceutical industries soon.

Despite uncertain conditions and a historically slow second quarter, companies may be willing to take more risks this quarter, which could bring back M&A activity.

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