Blood in the Water: COVID-19 M&A Implications

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The COVID-19 pandemic is having a profound economic impact across the globe. Entire industries have ground to a halt and unemployment claims reached record highs, as demand has disappeared due to government-mandated restrictions. Not surprisingly, equity markets are pricing in this turmoil, with the S&P 500 index losing one third of its value from February 19 to March 23.

As of April 15, the S&P continues to be down by 18% from its February 19 peak. As the global public health and economic crises continue to unfold, companies should consider more than just the impact on operations. Valuations have declined significantly across the board, and the resulting market dislocation will likely bring a rise in contentious situations in mergers and acquisitions (M&A). This raises new challenges for boards and executive teams as companies are more vulnerable to potential attacks as compared to normal market conditions.

This Is Different but Also the Same

While every major economic crisis is unique, there are also common characteristics that often repeat. Similar to 2008, the current downturn is characterized by a severe slowdown in economic activity, elevated unemployment, and financial market declines. Governments and central banks are attempting to offset the economic impacts through fiscal stimulus and monetary easing, but due to the ongoing global pandemic driving the downturn, there remains great uncertainty about the duration and the severity of the crisis.

In response to prior crises, companies have typically adopted a familiar playbook of responses, including more conservative capital allocation policies and M&A strategy. The current situation is no different in this aspect, as many companies wasted little time in announcing immediate plans to weather the storm by conserving resources through reduced capital expenditures and suspended capital return to shareholders in the form of dividends or buybacks.

While M&A activity is expected to decline during the coming months, a closer look at 2008 offers some important observations that we anticipate may carry over in the current environment.

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