By Suzy Bibko, Content Marketing Manager, EMEA
As the COVID-19 crisis continues, a new state of play appears to be unfolding for the M&A industry, with different types of deals with different timelines, and a greater reliance on technology for getting deals done. How is the virus affecting volumes? How are dealmakers adapting? What will be the lasting effects on the industry? Dealmakers across EMEA and our panel of experts, Mark Beith, Claire Coppel, Nestor Paz-Galindo, and Merlin Piscitelli, shared their views about this new state of things at our recent webinar, EMEA M&A – A New State of Play, moderated by the FT’s Kaye Wiggins.
Deals down, but not out
The year appeared to be off to a good start before the virus took hold, with deal volumes and values up for many across EMEA in the first quarter of the year. However, reality seems to be setting in, and M&A value will likely see a significant drop before it rebounds.
“We started the year up 25% and now we’re down by 25%,” explains Paz-Galindo. “We’re probably going to see 30% decline in volume overall for the year. And around US$700-800 bn in transactions. The average volume in EMEA for the last 10 years has been around US$1 trillion, so a really stark difference. If you look at historical trends, there was a big dip post-2008 crisis, to around US$700-750bn, so we will likely see the same this year. Next year we’ll likely see some pick up, but still subdued.”
And as ‘reality’ seems to now be setting in that we’re in this for the long haul, the past 90 days have been indicative of the impact on the M&A market.
“We saw the makeup of our projects change early in the cycle,” reveals Piscitelli. Traditionally, around 70% of the projects on our platform are traditional M&A projects; 30% are other use cases. In April and May, we saw the pendulum totally swing in the other direction, with 70% of the projects as the other types than M&A, and only 30% coming from traditional M&A projects. In June, the types of projects are changing again. We’re seeing the M&A volumes of our projects pick up in the mid-market space and in several different sectors that are proving more resilient to the COVID situation and sectors with a longer-term view.”
“We’ve seen build times [for projects on the Datasite platform] increase by about 50%,” explains Piscitelli. “And we’ve seen live deals kept open on our platform, with only 7% closing, indicating the desire to go back to market when uncertainty clears. They’re not shutting down completely, which indicates that there are a lot of good deals and distressed deals that are in the pipeline that should be coming to market in the second half of the year.”
“The sectors that we continue to work in are those that can have a proper forecast, a long-term view, and a proper assessment of trends,” agrees Paz-Galindo. “Telecoms for example, is clearly still very active as a sector. Infrastructure is quite active and resilient, and healthcare. In a traditional year you would have those big sectors being roughly 40%-45% of M&A volume, but this year it will probably be higher.”
And what about PE, with record levels on dry powder at the ready?
Beith says that while the sector is well placed to take advantage of the current situation, several factors may mitigate an increase in PE:
“The growth of the less cyclical services sector has dramatically smoothed the business cycle over the last century and we’re now at a point where the services sector is at about 85% of all jobs,” explain Beith. “With social distancing of any kind it’s hard for services to fully recover. That’s going to put quite a dampener on a large swathe of the economy. And there are lot of private investors that are experiencing a bit of trepidation, particularly in the context of the valuation environment.”
Technology, preparation and diligence
The pandemic has also been a catalyst for people to focus on adopting technology more in the deal process. Whether it’s virtual site visits or more video calls, dealmakers are learning to adapt to a new, and in some instances permanent, state of play.
In fact, our new report The New State of M&A, which surveyed 2,235 M&A practitioners from around the globe, found that dealmakers believe due diligence is the aspect of the M&A process that can most be enriched by technology, and AI and machine learning will have the most transformational impact the M&A lifecycle. Moreover, they expect the due diligence process to accelerate to one month or less by 2025.
“We’ve seen a big adoption of tools like Datasite Prepare and Integrated Redaction, as well as our Datasite Outreach asset marketing platform that allows you to reach out to multiple parties in that process because you just can’t do it the same way in terms of face to face meetings anymore,” reveals Piscitelli. "We’ve also seen an uptick in the number of COVID-related searches within our datarooms, where it’s created a unique work stream within the due diligence process.”
Coppel says she, too, is seeing more time spent on the preparation phase. “Our clients are thinking very carefully about whether or not it’s right to be pursuing a 100% acquisition or sale and whether to pursue perhaps minority investments, consortium arrangements, or contractual collaborations. They are also thinking about what appetite there is in the market for their assets and what execution risks those potential buyers represent. I think management teams are under a huge amount of scrutiny at the moment, so what you don’t want to do is embark on a sale process and have that fail. There are serious costs to reputation and commercial risks attaching to that in this climate.”
Arguably, not everything is changing in the M&A process, but they are perhaps being taken to a heightened level. “I think a lot of the same questions are being asked in the due diligence process, but they’re just being taken to the next level right now,” argues Beith. “And we’re perhaps seeing a higher quality due diligence, as you’re not trying to cram everything into one site visit in one day, for instance.”