The first six months of 2020 has registered a massive drop in M&A activity. The total value of deals announced in H1—both completed and pending—was US$901.7 billion, 53% below the same period the year before and the lowest half-yearly total since H1 2010. Volume, meanwhile, fell 32% year on year, to 6,943 deals, the lowest half-yearly volume total since H1 2013.
Looking only at the second quarter, when the extent of the pandemic became clearer around the world, the collapse in dealmaking was even starker. Total M&A value came to only US$309.2 billion—a 69% drop on the same period the year before and the lowest quarterly total on Mergermarket record (since 2006). Volume figures fared somewhat better, falling 49% year on year to 2,634 deals, the lowest quarterly total since Q3 2009.
Megadeal activity tumbles
Much of the drop in deal value can be attributed to a collapse in dealmaking at the top end of the market, especially in the second quarter. There were only nine megadeals (deals worth US$5 billion or more) in Q2, coming to a total of US$78.2 billion, compared to 25 such deals totaling US$461.1 billion over the same period the year before. Across the first half as a whole, there were 31 megadeals, 39% below H1 2019. Total megadeal value in H1 came to US$296.9 billion, a 69% year-on-year drop.
By far the largest transaction of the year is the proposed merger between the world’s second- and third-largest insurance brokers, Aon and Willis Towers Watson, in a US$35.6 billion (net debt included) deal announced in early March. If approved by shareholders and regulators, the combined entity would overtake Marsh & McLennan as the world’s largest insurance brokerage.
The largest deal of Q2—and the second-largest deal of H1—was a US$20.3 billion asset swap between Abu Dhabi National Energy Company (TAQA) and Abu Dhabi Power Corporation (ADPower).
Neither the Aon deal nor the TAQA deal has completed, which is not unusual for large transactions. But given the high levels of uncertainty around the continuing spread of COVID-19 in many regions, a greater number of deals than normal could fall through in the coming months.
In fact, one of the largest announced transactions of the year so far, Xerox’s unsolicited bid for HP Inc, which would have valued HP at an enterprise value of US$35.5 billion, was pulled a few weeks after announcement. Xerox, which announced its takeover offer at the start of March, cited “the current global health crisis and resulting macroeconomic and market turmoil caused by COVID-19” in its decision to abandon the deal at the end of that month.
TMT and financial services top sectors
As a significant proportion of the world’s population went into lockdown, people turned to digital solutions for work, education and entertainment—which explains why the technology, media and telecoms (TMT) sector has been among the most resilient for M&A in 2020.
There was a total of 1,553 transactions in the TMT sector in H1, worth US$201.2 billion. Although this represents a 25% and 31% year-on-year decline in volume and value respectively, it is still the highest total volume and value of any sector over this period. The TMT sector fared relatively well even in the second quarter—while volume declined by 41% and value by 50% compared to the year before (to 633 transactions worth US$97.1 billion), a number of significant deals were announced in May and June.
The largest TMT transaction of H1 was announced in the second quarter—Spain’s Telefonica and US-based Liberty Global’s merger of their UK mobile telecoms assets, O2 and Virgin Mobile—in a deal worth US$12.4 billion. The deal was announced in early May, after years of speculation and discussion, and is pending regulatory approval.
The financial services sector came in second in H1 by total value, boosted by the US$35.6 billion Aon/Willis Towers Watson deal. A total value of US$159 billion was recorded in financial services dealmaking in H1, across 1,230 transactions, 51% and 33% below H1 2019, respectively.
Regional variation
Although all regions of the world saw M&A decline across H1, some regions fared better than others. Latin America and the Caribbean recorded the sharpest year-on-year drop in M&A of any region in Q2. Deal value crashed by 95% while volume fell 61% compared to Q2 2019—to US$1.1 billion across 64 transactions—as the COVID-19 crisis hit the region especially hard.
In contrast, Asia saw the least steep drop in M&A in Q2. There were 830 deals worth US$114.6 billion, a 19% and 11% drop year on year, respectively, thanks in part to a number of large-ticket TMT transactions in China, including the US$7.6 billion take-private offer for 58.com, a New York-listed Chinese online classifieds portal.
With increasing tensions between the US and China, such take-privates of US-listed Chinese firms may grow more popular, especially if such firms continue to trade at depressed valuations.
Uncertain future
In its latest World Economic Outlook (WEO) forecast, released in June, the International Monetary Fund is projecting that the global economy will contract by 4.9% this year, 1.9 percentage points more than in its April update.
Although many advanced economies have seen their rates of new COVID-19 cases drop, the pandemic is still accelerating in some countries. Latin America, for example, has become the new center of the outbreak. Meanwhile, in some regions of the US, new infections have risen after social distancing measures were eased.
With government support programs designed to soften the blow of the crisis ending in many jurisdictions in H2 and the always-looming possibility of a second wave of infections in countries that have managed to get the pandemic under control, much remains uncertain for the global macroeconomic landscape.
Still, there are reasons to hope that the worst is over for global M&A. Stock markets have recovered strongly—although these gains may be out of touch with underlying economic data—and M&A data in Q2 shows a month-by-month increase in both volume and value. June 2020 recorded 912 deals globally, worth US$131.4 billion. Although this was significantly below the 1,755 transactions in June of the previous year totaling US$446.2 billion in value, it represents a 6% rise in volume and a 43% increase in value on May, which itself registered a small rise in M&A compared to April.
