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When it rains, it pours. M&A Trends during the COVID-19 pandemic.

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When it rains, it pours. M&A Trends during the COVID-19 pandemic.

Assistant Professor of Finance at NUGSB, Dr. Gabriele Lattanzio shared his opinion on Mergers & Acquisitions' trends during the COVID-19 pandemic.

2020 was an exciting year for the M&A market. It began with a strong Q1 up to the beginning of the COVID-19 pandemic, which effectively caused an abrupt shut down of the global M&A activity. The end of the lockdown regime and the restart of the global economy, fueled by global quantitative easing and economic stimulus packages, coincided with a new spike in M&A activities during which firms who survivd the lockdown regime while retaining high level of cash holdings found themselves with an unprecedented opportunity to consolidate their markets at a discount. As a result, a record volume of M&A deals amounting to six times the volume of M&A activity observed in Q2 was observed in the last quarter of 2020. To put this into perspective, despite the low volumes characterizing Q2 and Q3, the unprecedented activity recorded in 2020 puts the COVID-19 year among the TOP 10 years by aggregated deal valuations, with announced mergers cumulating to over $3.6 trillion.

2021 has so far offered more of the same. Global deal-making activity has already passed $4 trillion and it is on route to hit a record of about $6 trillion. High tech, financial services, industrials and energy sectors account for the vast majority of deals. Yet, many companies went out looking for bargains in the retail, hospitality and transportation sectors, in which many firms were forced to sell assets and corporate branches to restructure the increasing leverage position coming out of the pandemic.

With respect to the geographic distribution of the occurred deals, the U.S. market still represents to most market worldwide, despite the record-high yearly growth of M&A activity recorded in Europe (+50% YoY). Chinese companies have also been particularly active acquirers, focusing in particular on the acquisitions of domestic firms and assets. Such a focus towards domestic opportunities is not due to recent shift in the Chinese economic policies, exclusively, but also to the rise levels of political protectionism displayed by Western Governments.

Another particular trend emerged during the last 24 months of turbo-charged M&A activity is represented by the wide-spread used of Special Purpose Acquisition Companies, or SPACs. These “financial black boxes” have no commercial operations and are established with the sole purpose to raise capital from investors to acquiring one or more operating businesses. They raise capital in an initial public offering and use the cash to merge with a private company and take it public. In the first quarter of 2021, SPAC activity exceeded the record-high level of the entire 2020, but it then rapidly decline in the second half of the year, suggesting that the current M&A frenzy might start cooling down in 2022.

Conversely, the contribution of the Private Equity industry to global industry consolidation is still strong, with PE funds recording record amounts of dry powder and deal valuations remaining at the highest levels in over a decade.

As we slowly move out of the pandemic regime, high M&A activity is likely to continue in Q1 2022, fueled by high private equity investments and market valuations. Yet, with inflation risk appearing at the horizon, investors and managers should be aware that a sudden tightening in monetary policy might result in a rapid decline in the number of deals worldwide.