After a decade-long bull run, mergers and acquisition activity slowed sharply earlier this year as global economies came to a halt. But there are signs of life in the M&A market as countries start to reopen, according to Michael Carr, Dusty Philip and Gilberto Pozzi, global co-heads of Goldman Sachs’ Mergers & Acquisitions business in the Investment Banking Division. They recently shared their outlooks on the year ahead.
Michael, your team recently completed an analysis of M&A cycles over the past 30 years. How does the current downturn compare with past historical cycles?
Michael Carr: Our analysis shows that there have been three significant M&A down cycles over the last three decades—in 1990 and 1991; in 2001 and 2002; and in 2008 and 2009. During each of those downturns, M&A volumes declined by about 50 percent over a two-year period followed by another three to six years before volumes recovered to their prior peaks. Of course, all M&A cycles are unique and this pullback is different than the most recent downturns. For one, event-driven downturns like the current one typically recover more quickly than ones caused by cyclical or secular forces. In addition, companies across sectors as well as financial services firms were generally in strong shape before this shock and, as a result, are well-positioned to act quickly as the economy recovers. To be sure, the uniqueness of this pandemic has far-reaching implications for industry profitability, valuations and deal structuring, among other things.
Where are we in the current down cycle, and are you seeing any signs of a pickup?
Michael Carr: While every cycle is unique, recoveries after severe downturns tend to follow three types of “waves.” The first wave is characterized by involuntary M&A deals, such as bankruptcy sales or forced asset sales to generate liquidity. These are largely board-instituted transactions that are done when companies have limited options and are just trying to survive. We believe we’ve entered the second wave of M&A, known as “near-in M&A,” where management teams are looking close to home for potential combinations or joint ventures as a way to reduce transaction risks. In April, for example, we advised Prudential Financial on the sale of its life insurance business in Korea to Korean financial services provider KB Financial Group. Mergers between similar companies or close competitors tend to create situations where realized synergies represent a larger percentage of earnings. The third M&A wave is when you see transactions geared to creating growth, such as acquisitions of non-core businesses and cross-border transactions.
What could be different about the current down cycle and recovery?
Dusty Philip: As Michael noted, we believe this current down cycle is likely to be relatively short-lived and, based on our conversations with clients, we expect a meaningful pickup in the second half of this year. Private equity—which is sitting on an estimated $1.5 trillion of dry powder—is taking a larger, more active role in this environment, especially private investments in public equity. In previous downturns we have seen significant pent up demand for M&A transactions drive a higher level of strategic activity during the recovery. We expect all-stock transactions to predominate as this structure allows both parties in a transaction to benefit in the upside as the economy recovers.
How will the pandemic shape the types of deals that we’re likely to see?
Dusty Philip: We continue to see a high level of strategic ambition from clients, although we anticipate that strategic priorities will shift as a result of the pandemic. Several trends that have been in place for years have accelerated over the last few months. In particular, clients are likely to prioritize technology investments in response to accelerated digitalization in many industry sectors. Also, we have seen an increased emphasis by clients on ESG issues during this downturn with particular emphasis on employees, diversity and the environment.
How has the pandemic affected global M&A trends?
Gilberto Pozzi: Prior to COVID-19, we had already seen a slowdown in cross-border transactions, a pickup in domestic consolidation and a move toward protectionist strategies. COVID-19 accelerated those trends. Today, we’re seeing more governments across the world tighten the rules on foreign investments in prized firms and sectors in their countries. And in China, where concerns over tariffs and trade had been rising last year, we expect to see a rise in domestic consolidation and a more challenging backdrop for outbound M&A.
What’s your outlook going forward?
Gilberto Pozzi: With the equity and debt markets stabilizing, and based on our dialogue with clients, we expect to see more M&A in the second half of this year and in 2021 with volumes returning to pre-COVID levels. Many transactions have been put on hold rather than cancelled, and therefore we expect those deals to come back once the conditions are right. Large companies, for their part, are weathering the crisis better than smaller ones, while in Europe—which still needs to deal with Brexit—we expect to see more efforts to create national and European leaders.
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