The “art” of doing business has become quite a difficult sale this year.
Rainmakers in the global M&A business saw the count of completed deals drop to $ 1.11 trillion in the first six months of the year, about half the volume seen during the same period in 2019, for the worst first half in at least 15 years, according to Dealogic data.
After all, how can you buy or sell a business after a pandemic has covered the world with closed deals, travel bans, and uncertainty?
Harris Arch, DuPont Capital Management’s lead portfolio manager for the company’s merger arbitrage strategy, said that despite the sharp mid-March credit freeze has passed and the reality of negative corporate earnings has sunk, The pandemic still poses challenges when it comes to the basics of M&A.
“We have heard from bankers, in calls, about drone due diligence,” Arch told MarketWatch, referring to the typical process by which interested buyers would walk out and “kick the tires” of a potential deal before doing any offer. Now it has become yet another task taking place in the virtual world.
And for transactions that go beyond the “exploration” phase to a real deal, the parties have been looking at what events could become breakpoints in the months before a transaction can be completed, Arch said, including the adding details about COVID-19 consequences, not just generic “pandemic” warnings, that could materially affect a business.
In other words, after several high-profile transactions fell apart, the new playbook means thinking of the unthinkable.
L Brands Inc. LB
and Sycamore Partners in May agreed to walk away from their pre-COVID plans to take Victoria’s Secret in private, after the lingerie vendor closed its stores in the United States and laid off many of its workers in March in response to the pandemic. More recently, Simon Property Group Inc.
SPG,
in June he said he was finalizing his deal to buy a real estate investment trust Taubman Centers Inc. TCO
alleging in court that there was a violation by Taubman in terms of his inability to mitigate the impact of the pandemic.
Taubman’s attorneys responded in court, saying Simon knew that “a pandemic was happening in the world,” and called the breakup “a classic case of buyer’s remorse.”
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‘Unlike 2008 and 2009, there were many simulations and extensions. Here, there is no simulation. You just have to extend it.
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The companies involved in those deals did not respond to a request for comment, or declined to comment beyond what was already in the public arena, for this report.
Neil Hennessy, chief investment officer of mutual fund operator Hennessy Funds HFCSX,
from Novato, California said there is more to getting the numbers right when merging, buying or selling companies. While he said Zoom videoconferencing may offer an alternative to doing business primarily by phone or email during the pandemic, he also believes they are a poor substitute for sitting at the table with someone when negotiations heat up.
Mergers and acquisitions have been a large part of the mutual fund industry for several years, particularly as companies have sought to grow to compete with “mega managers.” Hennessy does not expect the coronavirus pandemic to slow that trend overall, but he is looking forward to the return of the meetings in person to better determine what partnerships might be possible.
“I like to have an idea of who I’m dealing with,” he told MarketWatch.
An upward increase in California cases prompted Governor Gavin Newsom on Monday to order all counties in the state, the nation’s largest economy, to close bars, restaurants, movie theaters and wineries. Major US benchmark indices ended the session mostly lower, with the Nasdaq Composite Index COMP,
falling 226.60 points and the S&P 500 SPX index,
close 29.82 points lower.
Meanwhile, Mergermarket, an industry news and data service, noted an increase in “doubts” among active buyers and sellers in the US market in the first half of the year, tracking $ 77.3 billion in businesses that were withdrawn or terminated altogether.
His summary of mergers and acquisitions in the first half of the year described a “bleak environment” for negotiators that rivaled the global financial crisis of 2007-2008, but also said there have been more recent signs of thawing.
Clearly, the COVID crisis did not start within the banking system, as the last collapse did. And this time, the regulators’ response has been to help prevent a cycle of defaults, layoffs and fire sales.
Coronavirus update: Global Case Count Reaches 13 Million, and Florida Tops California’s Record One-Day Case Record Last Week
“Unlike 2008 and 2009, there were many simulations and extensions,” said Cynthia Romano, global director of the CohnReznick Advisory dispute resolution and restructuring group. “There is no simulation here. It just spreads. “
Specifically, Romano said that banks, with the blessing of regulators, since March have been offering most companies a series of 90-day debt extensions. “On the distress side, everyone is preparing,” he said. “But it will probably be the third quarter or the fourth quarter when conversations start about what lenders want to do.”
In March, the Federal Reserve also announced a series of emergency loan facilities of more than $ 2 trillion to keep credit flowing through the financial system during the pandemic. The injections not only calmed the debt and equity markets, but also led to a wave of record-breaking corporate loans from investment-grade and “junk” companies rushing to save cash for tough times.
In particular, on the equity side there has also been some recent M&A activity, such as Uber Technology Inc.’s
UBER
$ 2.65 billion purchase of shares in Postmates Inc, a food delivery service.
Read: Uber Bets on Delivery with $ 2.65 Billion Acquisition of Postmates as Transportation Stands
Jonathan Knee, a senior advisor to Evercore, which focuses on mergers and acquisitions and restructuring, and a professor at Columbia Business School, sees three main areas where mergers and acquisitions have continued and could see a rebound.
Distressed situations, particularly where there have been liquidity problems, have led to some deals, he said. But companies with high valuations of the public market during the pandemic have also been buyers. And share-for-share discussions have been going on as companies focus on core lines of business.
“There’s nothing like a crisis for you to focus on what’s important in life,” he told MarketWatch. “That is true for people and companies.”
Knee still hopes that there are challenges ahead. “When you can’t confidently tell your board what your own results will be for the year, it’s very difficult to hit the table to acquire someone else,” he said.
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