Global M&A market has commenced its rebound, says BCG

A year that has seen a decade low in global deal activity appears to be on the mend according to Boston Consulting Group (BCG) – judging by trends in transaction volumes.

Only twice since 2007 has the number of monthly transactions worth more than $500 million dropped below 40 for consecutive months – once in the wake of the 2008 financial crisis, and once this year. BCG has worked in collaboration with researchers at Paderborn University in Germany to analyse the current state of the struggling market.

The research found that this year’s decline was actually steeper than back in 2009, highlighting just how bad Covid-19 has been for deal activity around the world. Investors appear to be holding their money close amid a global demand shock and widespread economic uncertainty.

By April, merger and acquisition (M&A) deal volume had dropped 80% compared to the end of last year. “As of mid-September, there had been only 15 megadeals in 2020 (compared to 27 in the same period in 2019). None exceeded $50 billion in value, and only 10 have been announced since mid-March,” explained the BCG report.

Some sectors might have been more subdued than others, although every industry has seen a drop of between 15% and 30% for the first half of this year compared to the first six months of 2019. Devastating as the start of this year has been, BCG suggests that the worst might just be over.

The researchers note that anywhere between 40 and 70 monthly transactions of more than half a billion dollars each is usually considered a benchmark for a stable deal market, if not a healthy one. Well below this threshold for the first half of this year, transaction activity appears to have climbed up beyond 40 monthly deals between June and August.

According to BCG senior partner and global head of M&A Jens Kengelbach, this is a harbinger of better times. “Indeed, the uptick in M&A activity that began in June suggests that the M&A market has already turned the corner in recovering from the crisis. Although a return of major Covid-19 lockdowns could set back the recovery, bold dealmakers view the downturn as creating attractive opportunities to pursue strategic objectives – through classic M&A as well as alternative deal structures.”

As investors look to buy the dip, a number of factors exist to bring deal activity back on track. For one, it helps that there is a growing pool of distressed assets on offer. The sheer economic disruption from the crisis has compounded debt burdens for many businesses, and the natural response has been to divest non-core operations. According to BCG, the number of distressed deals is likely to spike as a result. 

What remains is for investors to get back in the field. According to BCG, the record levels of dry powder currently sitting with global private equity and venture capitalists shows that investors have the money and they’re just waiting to spend it. Since last year, dry powder reserves grew by 8%, with the total currently hovering around the $1.5 trillion mark. 

Deal activity should regain traction once these funds enter circulation; the question remains of when investors will take the risk. Many are likely to remain cautious with their investments, biding their time. At the same time, buying the dip is historically lucrative, and those with a high risk-appetite will likely be scouring the market for potential cash cows. According to BCG, timing is everything for these bold investors.

“Our research shows that deals done in a downturn outperform. Examining the 2008–2009 global financial crisis and its aftermath, we found that the sweet spot for large transformational deals occurred as soon as uncertainty subsided. At that point, funding became available and market volatility decreased, but targets were still available at a discount,” explained Kengelback, who co-authored the report.

“And being bold clearly helps. Our research has shown that acquiring companies outside of the core business during a downturn helps to position a company for success during the recovery. Examples during the 2008–2009 crisis included PepsiCo’s acquisitions of its two largest bottlers and BlackRock’s acquisition of Barclays Global Investors,” he added.  

So the funds are there, and there are opportunities to be found. The uptick in deal activity might already reflect the combination of these factors, while it remains to be seen how M&A pans out for the rest of this year.