Deal-making Disarray

Miranda Zhao, Head of M&A, Asia Pacific

We are undeniably facing what could be one of the worst global economic periods in our working lifetimes. Our clients are facing an exceptionally challenging environment too. While M&A may not be on top of their priority list at this point in time and with deal flow has been severely impacted, many will be forced to act and new opportunities will arise. 


The impact of the Covid-19 crisis has been swift and severe, with global deal-making value down around 40% in the first quarter of 2020, after nearly ten years of growth. Both the overall deal value and number of transactions are on par with levels seen during the first quarter of 2008, the start of the global financial crisis. In Asia, the picture wasn’t that much more inspiring. First quarter overall deal value fell by 32% year-on-year, to the lowest quarterly value since 2013. The crisis sent share prices around the world plummeting and left many companies in challenging positions. There is very little doubt that the flow of M&A deals will continue to be impacted as we progress into the year, both in terms of ongoing transaction executions and the deal pipeline.


On ongoing transaction executions, deals that are signed and subject to binding terms may have little flexibility to be renegotiated (though we expect bidders to revisit where possible), while for transactions already in the market, principals and advisors are reassessing the situation daily and considering whether to extend or delay the process timing to accommodate the current environment or manage the risks arising from the market uncertainties. In addition, financing for M&A transactions are becoming less readily available and potentially more expensive, as we see corporates currently seeking liquidity to weather the crisis. And with economies across the world already in varying levels of lock-down, it’s clear that strategic M&A moves will be delayed to allow companies to focus on the resilience of their operations as well as the safety and health of their staff and clients.


As we have experienced in past financial and economic crisis, the landscape and dynamics for deal-making will be profoundly changed, and we will see new opportunities arising. Some companies will be forced to transact in order to survive or to refocus on their core business, while others will be in a position to take advantage of the market conditions to grow and diversify. In the months to come, we should expect to see an increase in distressed M&A and consolidation M&A in the most impacted sectors. Some financial sponsors and special situation investors remain cash rich and ready to deploy capital to capture market opportunities. Already, we have been receiving enquiries about potential opportunities in divestitures, take-private, distressed sales, as well as selective cross-border opportunities.


The M&A market could be impacted in the following ways post crisis, especially for Asia:


First, we expect to see significant changes in terms of the volumes and nature of deal by sectors. Sectors that have been hard hit, such as transportation, tourism and consumer discretionary, could see more consolidation taking place, with weaker players exiting markets.  More resilient sectors, such as infrastructure, telecom and renewables could experience a less volatile deal activity during this cycle. Overall, companies with higher leverage may be the most vulnerable and become potential targets for healthier consolidators or financial sponsors.


Second, activity levels by geographies could pick up at different paces, and the characteristics of the transactions by region are likely to evolve.  Here in Asia, we are seeing the largest market, China, gradually resume production and we expect M&A activities from Chinese corporates to gradually pick up in the second half of the year. Europe remains the most important region for China’s outbound M&A, as acquisitions of US businesses have significantly decreased with the trade war and political tensions.


We expect fewer mega Chinese outbound deals given the overall economic environment and the foreign investment restrictions imposed by various governments, but the mid-cap space remains very active for Chinese investors. Both State Owned Enterprises (SoEs) and Privately Owned Enterprises (PoEs) will play an active role in China outbound acquisitions post crisis, with SoEs more focused on larger-sized transactions in more strategic sectors to China.


Third, the deep impact felt as a result of global supply chain disruption in the wake of the Covid-19 crisis may serve as a ‘wake-up call’ to many companies, demonstrating a need to diversify their operations and shift their supply chain to multiple Asian countries for instance, or even relocate part of their production back to their home markets, which could also lead to selected M&A situations.


Last but not the least, the regulatory and legal environment is also changing swiftly in reaction to the new market trends that could be re-shaping the global M&A momentum. The geopolitical agenda will increase in sensitive sectors. On execution level, we are seeing investors seeking more contractual protection through potentially considering earn-out structures, allocating unexpected risks with material adverse event clauses in transaction documents, and diligencing more carefully the targets’ litigation risks potentially from the Covid-19 situation.


M&A continues to be an essential and powerful component of companies’ strategies, through peak and trough of economic cycles. Our philosophy remains to help our clients do the right deal, at the right time. We can only achieve this by staying focused on our clients and connected across regions and products, and by supporting each other during this special period. Things may get worse before they get better, but what we do know is, things will get better.