Mergers and acquisitions are critically important business events, acting as a key indicator for the economy. Strong M&A activity correlates with economic confidence, while weak M&A activity suggests that businesses are reluctant to take risks in a stormy economic climate.
But with current events around the world roiling the global economy, what was the impact on M&A for Q1 2020? In this article, we’ll recap the state of M&A in the first quarter of 2020, as well as some of the most important lessons we’ve learned so far.
1. A sharp year-over-year drop
At the end of 2019, analysts were split over what the new year would bring for M&A. According to Deloitte’s “2020 M&A Trends Report,” 63 percent of corporate executives believed that M&A activity would increase in the new year; however, this was down from 79 percent with a rosy outlook the year before.
Thus far, the naysayers seem to be correct—although perhaps not for the reasons they believed. Global Q1 M&A activity for 2020 has declined by 28 percent year-over-year, from $964 billion in Q1 2019 to $698 billion. The total number of deals dropped by 16 percent, suggesting that the deals that did go through are also smaller than last year’s.
Much of the M&A slowdown has come in the past few weeks alone. January and February saw a fairly healthy $151 billion and $230 billion in worldwide M&A activity, respectively. Yet while there was $131 billion of deals in the first half of March alone, the second half saw a plunge to just $49 billion.
2. U.S. leads the decline, with other regions a mixed bag
The dramatic decrease in M&A deals during Q1 2020 is in large part due to the U.S., which is already the world’s largest market for M&A. U.S. deal activity last quarter plummeted by roughly half, to just $252 billion.
Meanwhile, M&A in Asia saw a smaller year-over-year decline of 17 percent, to $143 billion. Europe, on the other hand, actually saw Q1 2020 M&A activity increase to $232 billion. This was in large part thanks to several massive M&A deals announced before the current crisis, such as Russia’s $39 billion purchase of the banking and financial services company Sberbank.
3. Economic factors are affecting deal activity
As expected, the global economic crisis is the most immediate cause of the decline in Q1 2020 M&A deals. The reasons for the M&A slowdown include:
Challenges in obtaining M&A deal financing from banks that are dealing with more pressing immediate concerns.
Extremely volatile stock markets, which make it more difficult to ascertain a company’s true valuation.
Disruptions to workplace routines as many businesses have shifted to a remote working environment.
These problems are already having tangible effects on M&A activity. In late March, Xerox announced that it would abandon its $35 billion attempted hostile takeover of Hewlett-Packard due to the current economic disruption.
While the recent turbulence has impacted nearly every part of the economy, not all sectors will be equally affected. Travel and tourism, hospitality, and retail are expected to be among the industries that are hardest hit during the downturn, and which will thus see the greatest decline in M&A activity.
4. Major players are still making moves
Even without the crisis, the first quarter of 2020 was already on track for less M&A activity than Q1 2019. Yet there were still several high-profile deals this quarter, including:
Morgan Stanley’s $13 billion purchase of E-Trade in February.
Intuit’s $7.1 billion purchase of Credit Karma in February.
Aon’s $30 billion purchase of Willis Towers Watson in March.
Some analysts have speculated that major tech firms, who may be relatively untouched by the crisis, will use this as an opportunity to go on a shopping spree. For example, cloud computing providers such as Google, Amazon, and Microsoft may be looking to scoop up smaller companies at a discount in order to bolster their current offerings. RBC Capital Markets managing director Alex Zukin predicts that Google and Amazon will be looking for application-focused companies, while Microsoft will be interested in security and AI.
With uncertainty and instability the new normal, it’s anyone’s guess how M&A will shake out for the rest of 2020. No matter what happens, we’ll be here to bring you all the details—so watch this space for the latest M&A news and information.