Back To Category

Thawing the dealmaking freeze

Investor confidence in North America has been left shaken after a turbulent period like no other — with the impact of COVID-19 underscored by falling M&A in first six months of 2020.  

The resurging virus, social protests and upheaval, lockdowns, trade wars and a looming presidential election have all contributed to a decline in M&A deals, according to the latest Baker Tilly International/Mergermarket report on the investment outlook in North America. 

The report finds dealmaker confidence in North American markets has been drained by global events, with 87% reporting COVID-19 is having a negative impact on their investment decisions and half shelving plans for any cross-border M&A until the pandemic abates.  

Global dealmakers: North American M&A market update 2020
Download the full report

But even a faster-than-expected return to health might not reignite M&A this year. 

“While megadeals have been non-existent, deal makers will have an appetite for middle-market transactions which today have more attractive valuations and are easier to finance than their megadeal counterparts.”
– William Chapman

Nearly half of respondents believe the upcoming US elections in November will have a negative impact on M&A and there are grave doubts that the market will bounce back even as case numbers fall.  

“We are finding that dealmakers still have concerns and questions about the impact COVID-19 will have on North American deals, however, the hesitation to bring deals to market, in a few sectors, has dissipated as the health crisis extends and evolves,” says William Chapman, Partner at Baker Tilly US.  

“We have seen a sharp decline in deal volumes but even a bigger fall in deal values. While megadeals have been non-existent, deal makers will have an appetite for middle-market transactions which today have more attractive valuations and are easier to finance than their megadeal counterparts.” 

Globally, dealmaking fell to its lowest levels in more than a decade in the second quarter of 2020, with just US$485bn worth of deals – down from $1 trillion a year earlier. 

The fall in deal volumes that began from mid-2019 has accelerated at astonishing speed in the US, where overall M&A between April and June collapsed almost 90 per cent from a year earlier

Key results from the Global Dealmakers: North American M&A market update 2020

The megadeals that marked the M&A landscape in North America during 2019 all vanished; just three large scale transactions were announced in the first half of 2020, for a total value of US$40 billion.  

That figure sits starkly against the eight deals worth US$287 billion during the same time frame in 2019. 

But while megadeals were shelved or abandoned, the mid-market was seen as a source for potential recovery.  

Deals valued between US$10, and US$500m represented 79% of deals in 1H20 as dealmakers searched for deals that were reasonably priced and for businesses with proven track records of performance.  

While only 7% of respondents were bullish about the North American market overall for M&A compared to other markets, 18% believed mid-cap deals in the region offered better opportunity than in other zones.  

Still, about half said they believed the conditions for mid-cap M&A were roughly the same everywhere.  

North American M&A

The result reflects the general uncertainty for markets across the world, says Michael Sonego, a Partner with Pitcher Partners Australia and Global Corporate Finance Lead, Baker Tilly International, with no location untouched by the pandemic.  

“As with the rest of the world, 2020 will be a year with little joy in it for many dealmakers in North America,” Mr Sonego says.  

“The real question will be who can turn the disruption to their advantage, and who can make the most of limited opportunities. 

“Continued access to record levels of dry powder combined with a positive outlook toward global capital markets indicates PE investors may not sideline investment activity very long.”
– Scott Moss

“Businesses that have navigated the conditions, successfully pivoted to remain relevant to their clients, and performed well in unprecedented trading conditions will prove their worth.  

“It will be these businesses that are likely to be rewarded by buyers.”  

Scott Moss, Partner at Cherry Bekaert, United States, and Global Private Equity Lead at Baker Tilly International, believes the mid-market will be the first to see the return of buyer interest — particularly among private equity buyers, who are tipped to drive any recovery. 

“Continued access to record levels of dry powder combined with a positive outlook toward global capital markets indicates PE investors may not sideline investment activity very long,” he says. 

“As with past recoveries, mid-market deals will be the first to emerge from the downturn, and PE investors are positioned to take advantage of today’s favorable valuations.  

“This trend will once again illustrate the resiliency and attractiveness of mid-market businesses to PE investors.” 

Pandemic keeps technology sector deals ticking

If there is a bright spot in the gloom it is in technology, media and telecom, one of the few sectors to have shown any strength in the first half of the year. 

The sector accounted for 30% of volumes (678 deals) and 34% of values (US$96bn), respectively, with companies dealing in financial technology, those offering IT support, and those providing software as a service generating the most interest among investors. 

Technology has become a particularly hot industry in recent years as corporations and private buyers look to bolster the digital advantages of their operations — and the restrictions prompted by the pandemic have shown the importance for businesses across sectors of having a strong digital operation.  

What will be the impact of the ongoing pandemic regarding your intentions to complete cross-border and domestic deals in the year ahead?

Mr Chapman says the digital sector came into its own as the COVID-19 pandemic spread through North America and the world, helping companies not only continue trading but keeping people connected during the crisis. 

“Technology helped employees adjust to work-from-home situations, as virtual meetings and remote working became the norm,” he says. 

“There was also an increase in eCommerce business and operations, brought about as many bricks-and-mortar stores were forced to temporarily close.” 

Is the sleeping private equity giant stirring?

Tempting PE back into activity will be a key factor if H2 is improve on the poor conditions of the first half.  

Even amid depressed M&A activity, private equity firms were more active in the first half of 2020, when they accounted for 23% of transactions and 24% of values. That sits against historical data showing that private equity was involved in 20% of deals and 13% of values since 2015.  

The Dealmakers report also noted that HY-on-HY buyouts declined to a lesser degree than corporate transactions by value and that corporate deal values dropped 79% in the first half of 2020 compared to the same time last year, compared to only 58% for private equity.   

But while much has been written about the record amounts of dry powder at their disposal, some PE firms have shown reluctance to move and are instead sitting on the sidelines.  

Conversely, those PE groups that are actively looking for deals could be vying for a smaller number of assets as sellers also look to sit the disruption out.  

“Some companies will struggle to recover from the COVID-19 impact and distress-driven deals will factor heavily into deal activity for many months in 2021.”
– Michael Milani

Nearly all dealmakers (97%) believe private equity buyers will create the most competition for assets in North America, compared to 63% for corporate buyers. 

But picking the right target will be a challenge for PE in coming months as they weigh up the reduced price needed to secure distressed businesses versus the risk a poorly performing business can have on their own returns.  

“When conditions are bad at the end of a cycle, big deals are harder to come by, and we could see in late 2019 that the gap was widening between what sellers wanted to achieve and buyers wanted to pay,” says Mr Chapman.  

“Deals that come to market now include distressed sales and those where the seller has a strong exit incentive. There will also be sellers who are not prepared to sell the whole company at a depressed price but who are on the hunt for growth capital and need to compromise.  

“This is going to create the opportunities in some sectors for bargain buying — and excellent opportunities for those who can take advantage.” 

Michael Milani, Executive Managing Director at Baker Tilly Capital, believes consolidation and a refocusing of efforts will be key strategic drivers for many businesses for the next year. That will see some firms shed assets, while others consolidate.  

“Some companies will struggle to recover from the COVID-19 impact and distress-driven deals will factor heavily into deal activity for many months in 2021,” he says. 

North American PE buyout trends

“Other corporations, having been shocked by the impact, will focus on emerging from the pandemic on a stronger footing through consolidation.  

“So I would expect to see consolidation within sectors as making up a significant portion of deal activity.” 

The risk of carrying poor-performing assets could weigh on PE confidence and dealmakers remain bearish about exit prospects in North America in the near term.  

Mr Moss says there are significant challenges facing PE firms trying to exit investments right now.  

“It’s not the ideal time to find a buyer for an asset or a company because of that high level of uncertainty in the market,” he says. 

“With so many companies reducing their dealmaking activity, the biggest challenge facing PE firms would be finding a willing buyer.” 

Choosing an exit strategy and preparing a company or asset for sale was now more challenging and many respondents expect the valuations of portfolio companies under PE management to decline. 

Christopher Hines, Partner at Blum Shapiro in the United States, said bridging the gulf between expectations of buyers and sellers could deter owners from testing the market.  

“Business owners previously focused on exiting will likely be more focused on stabilizing businesses and returning to a new normal,” he says. 

“Business owners who still intend to pursue an exit should be aware that credit markets are likely to tread more carefully to minimize exposure, until businesses can prove that they have returned to a sustainable level of earnings.” 

Absence of certainty saps confidence

While the waves of the pandemic mean we can no longer call COVID-19 disruption unprecedented, the perfect storm of other factors are likely to keep confidence suppressed even if the case numbers fall.  

The re-emergence of trade tensions between the US and China could easily sap business confidence and derail a fragile economic recovery. 

In the past year, the US has announced new retaliatory trade restrictions and tariff hikes on foreign steel, aluminium and more than US$360bn of Chinese goods.  

These measures, however, have proven to be a burden on US companies dependent on imported goods and parts, chipping away at profits while negatively impacting business investment, according to news reports. 

One respondent observed that policies favouring protectionism are becoming more prevalent, not just in North America but globally, and such measures could have a profoundly negative impact on cross-border deals worldwide. 

The presidential election in November could also have a chilling effect.  

Heading into 2020, a level of caution was anticipated in investment markets, which is often the case in an election year, with the Global Dealmakers Report delivered in January noting that M&A was likely to be postponed in the run-up to the November poll.  

In the latest North American update, caution has evolved into pessimism with 43% of dealmakers surveyed saying they were feeling very negative about the election’s impact on M&A. 

Add to those concerns the impact of riots and protests across many parts of the United States and Canada in the aftermath of George Floyd’s death and you deal yet another blow to business operations and confidence. 

Some businesses that were forced to close as the COVID-19 crisis worsened in March and April had just started returning to normal trading before protests broke out in May, which led to curfews and businesses being targeted by vandals. With at least 25 cities affected, it may end up being the costliest civil disorder in US history, eclipsing the 1992 Los Angeles riots. 

“Every election is a choice, but it rarely feels like the stakes are as high or the difference in approach is as stark,” says Mr Chapman.  

“With an election coming on the back of a pandemic, it’s naturally going to put some deals on hold. That said, some sellers are moving forward as they are concerned about how capital gains taxes may change post-election.” 

“The other issue that has been growing in importance each time we look at North American M&A is the uncertainty and impact on supply chains caused by the now-entrenched trade war with China. Each time it appears there could be a resolution dealmaker confidence improves, but a détente seems unlikely in the near term.” 

Want to know more?

Get in touch with our experts from around the globe

  • By subscribing, you authorise Baker Tilly to store your contact information in keeping with our privacy policy

Related Articles

Cybersecurity and the remote working era Conversations

The second article in our series exploring the digital transformation, Baker Tilly probes cybersecurity challenges for the remote workforce.

6-8 minutes

A virtual tax haven? VAT and the metaverse Conversations

Billions of dollars are flowing through the metaverse, creating complex conundrums around how taxation should work in virtual reality. 

7-8 minutes

Gibraltar ‘frontier’ a rocky subject for Brexit Brexit

The UK’s territory shares a land border with Spain – can movement across it remain seamless as it has for 35 years?

4-6 minutes

Meet the experts

Michael Sonego

Pitcher Partners Australia, Baker Tilly International

View Profile

William Chapman

Baker Tilly United States

View Profile

Michael Milani

Baker Tilly Capital US

View Profile

Scott Moss

Cherry Bekaert

View Profile

Christopher Hines

Blum Shapiro, United States

View Profile
Contact Us