The coronavirus outbreak has already caused a slowdown in mergers and acquisitions, and the unprecedented nature of the global crisis means executives don't know how long the calamity will last—or how bad it will get.
For now, many dealmakers are forgoing transformational mega-deals in favor of smaller, discounted acquisitions. They're also focused on liquidity, shoring up balance sheets and tapping credit lines to make sure they're prepared for whatever comes next.
"Cash right now is king, so that's paramount," said Bill Casey, an executive at Ernst & Young who worked on the consulting giant's survey of more than 2,900 global executives. "But once companies get beyond that, the next step is really ... scenario planning and preparing for the recovery."
The survey, which was published last week, found that 73% of respondents expect the COVID-19 outbreak to severely undermine the economy, a major shift from last quarter's survey, when 54% of executives didn't expect any sort of economic downturn in the near- to mid-term. Of course, few could have anticipated a global pandemic.
The survey showed marked uncertainty about when the market will recover. Some 54% of respondents anticipate a more gradual recovery on a U-shaped curve after a longer slowdown that will extend into 2021. Another 38% expect a quicker, V-shaped recovery, with economic activity returning to normal in 2020.
For M&A, that recovery hinges on the return of workers to their offices and other usual employment locations.
"I think there will be a tremendous uptick in the level of deal activity," Casey said.
With that in mind, about 56% of executives surveyed are actively planning to pursue acquisitions in the next 12 months, an increase from October's figure of 52%. With companies selling for less than they typically would, some brave buyers plan to forge ahead in this market. Private equity firms are particularly well-positioned to scoop up companies at lower valuations now: US firms boasted a war chest of about $1.25 trillion as of June 30, according to PitchBook data.
Corporate resilience will be a key metric for evaluating future targets. Companies that were overly reliant on outsourcing or supply chains tied to certain regions may re-evaluate associated risks. This will in turn trigger future transactions to patch up these vulnerabilities, Casey said.
There's consensus that the pandemic's impact will be palpable. Just 5% of surveyed executives expected no hits to their profitability and margins. Some 56% of respondents expect a minor impact, and 39% expect a severe one.
Certain industries are better positioned for resiliency, like those with robust digital markets. Survey respondents ranked media, utilities and real estate as least likely to face difficulties during the outbreak. On the flip side, sectors like oil & gas, automotive, manufacturing, travel and leisure, food service and brick-and-mortar retail face the greatest challenges during this time—and some companies here will likely consolidate as a result, Casey said.
But for those companies that can weather this storm, M&A will present an attractive route to transform business models for a new reality where digital and physical life are synonymous and remote-work arrangements will no longer carry the same hesitations. Whenever the uncertainty ends, dealmakers may want to make up for lost time.
"Ultimately, companies are going to have to reimagine their business," Casey said. "The world will be changed fundamentally as a result of this, and that will lead to more transactions."