For most of 2020, economies around the world were on unsteady ground due to COVID-19. Total closed M&A transactions in the United States fell by roughly 15% in 2020 in comparison to 2019, which was a relatively healthy year for M&A activity. This was largely due to declines the market experienced at the height of the pandemic in Q2 and Q3. The overall deal count in Q2 and Q3 declined roughly 40% and 22% respectively when compared to the same quarters in 2019.

It is without question that COVID-19 had a profound effect on the U.S M&A market, however, not all sectors experienced the same declines. Pitchbook reported strong M&A performance in Healthcare, Financial Services, and Technology as these sectors were positively affected by trends created as a result of COVID-19. Including but not limited to, increased use of the healthcare system, anticipation of an extended period of low interest rates, and the spike in working from home were all trends that benefited the aforementioned sectors.  A sector that did suffer drastically from COVID was the Energy sector. Due to the increased amount of people staying and working from home, oil prices and demand plummeted. Pitchbook reported that “the sector had its worst year for M&A since 2009, with just 310 deals totaling $83.2 billion” in North America.  

Covid-19 Impact on M&A

To properly determine where the M&A market might be heading it is important put the pandemic into a historical perspective. Boston Consulting Group (“BCG”) looked at deal activity during the current environment and compared it to the 2008 financial crisis. In the short to medium term, BCG “expects the number of corporate divestitures to rise significantly.” Companies that suffered or are still suffering from the pandemic have lower than normal cash levels and/or excess debt that was built up through government assistance. As a result, companies will be looking to offload excess debt by divesting non-core business operations once M&A activity picks up.

BCG also expects that companies that cannot improve their balance sheet through divestments will inevitably be forced into insolvency. As a result, the number of distressed M&A deals will more than likely increase over the next few quarters, just like in the aftermath of the financial crisis in 2008.

The pandemic effected PE firm deal activity as well. BCG reported that “the number of PE deals in April 2020 was more than 70% lower than in December 2019.” This will most likely be temporary as during the pandemic PE firms were more focused on the health of their portfolio companies then looking for new opportunities. With dry powder remaining at record levels, there will be pressure to invest capital into new opportunities created from the pandemic. A similar story can be told about strategic buyers as they look to acquire businesses out of a downturn in similar fashion to the end of the 2008 financial crisis.