North American M&A deal value falls more than 25 percent in Q1

July 2020 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

July 2020 Issue

The COVID-19 pandemic had a significant impact on M&A activity in the first quarter of 2020, according to Pitchbook’s ‘North American M&A Report Q1 2020’.

Activity in the region reached $400.8bn across 3169 transactions, a year on year decline of 25.1 percent and a gain of 2.6 percent, respectively. Deal value in the quarter fell significantly due to a lack of multibillion-dollar deals, though the decline was tempered by deals which had already been negotiated before the pandemic really took hold. With most dealmakers working from home and valuation estimates varying widely, M&A is set to decline further in the coming quarters, Pitchbook estimates.

Much of the decline in value seen in the region was mitigated by deals agreed late last year. For instance, CPPIB’s $6.7bn acquisition of Pattern Energy Group was announced in November 2019 and closed in Q1 2020.

COVID-19’s impact on the stock market has, according to the report, influenced M&A activity, which has historically been highly pro-cyclical. Many large deals involving public companies have already been called off. Most notably, Xerox Holdings Corp ended its five-month long $34bn attempt to take over its larger rival, HP Inc in Q1. HP advised its shareholders against the merger considering the current climate. Similarly, a potential $22bn deal between 7 and I Holdings and Marathon Petroleum Corp also broke down due to COVID-19 issues as well as valuation concerns.

Financing availability, CEO confidence and social distancing measures (as face-to-face meetings are integral to the M&A process) have all contributed to the decline in dealmaking. The report suggests that North America is set to drop to around 400 deals in Q3 2020.

On a sectoral basis, some industries fared better than others. Healthcare saw strong year on year growth in terms of deal value. The largest deal to close in the quarter was Danaher’s acquisition of GE’s BioPharma business for $21.4bn. The deal was announced in February 2019 and closed in Q1 2020, despite the pandemic threat. The second-largest deal in Q1 was also in the healthcare sector: Centene acquired its managed care rival WellCare Health Plans for $15.27bn in a stock and cash transaction.

In the IT sector, though there were year on year declines in both value and number, they were not nearly as steep as seen in other sectors. IT comprised 21.7 percent of deal value in Q1 2020, compared to 17.4 percent a year earlier. The third largest deal was EQT and Digital Colony’s buyout of communications and infrastructure company Zayo Group for $14.3bn.

The coming months will be trying for all sectors and dealmaking will suffer. However, as Pitchbook notes, corporate acquirers had amassed record amounts of cash on hand prior to the outbreak, and private equity (PE) firms sit on over $1.5 trillion in dry powder. At least some will pursue deals during the coming downturn, especially as valuations fall.

As the report notes: “It can be a challenge for management and shareholders to agree on a price for a majority acquisition when stocks are down significantly.” The report also suggests that some PE firms are making alternative types of investments, such as private investment in public equity (PIPE) deals and other minority deals, in place of buyouts due to tightened credit markets. Pitchbook believes that these alternative deal structures could lead to majority acquisitions down the line.

Richard Summerfield