The merger and acquisition business on the Swiss market contracted during the first half of 2020. The number of transactions plummeted by around a quarter compared to the prior-year period. One key factor behind this decline is the coronavirus crisis, which has tarnished the earnings prospects of potential merger and acquisition targets. This is one of the insights offered by KPMG’s new M&A half-year report.
Even the merger and acquisition business cannot escape the impact of the coronavirus crisis: The pandemic caused the acquisition business to slow down considerably during the first half of 2020. A total of 130 deals were conducted during the first half of the year, which corresponds to a decline of 28 percent compared to the same period of the previous year (first half of 2019: 180 transactions). The last time a smaller number of transactions were recorded was in the first half of 2010 (125 deals). Due to the small number of deals with price tags in the billions, the transaction volume during the first half of 2020 dropped to USD 27.7 billion (first half of 2019: USD 87.2 billion), the lowest it has been since the first half of 2008, in the midst of the financial crisis (USD 22.5 billion).
The first half of this year still featured many transactions that had already been initiated prior to the coronavirus crisis. The environment for transactions deteriorated along with the spread of the coronavirus and restraint among investors grew. As expected, this resulted in a second quarter that was much quieter than the first quarter of the year. “We’re finding that the market is rife with uncertainty at the moment,” explains Timo Knak, Head of Mergers & Acquisitions at KPMG. “Many transactions have been suspended due to the fact that the earnings potential of merger and acquisition targets have become hazier under these special circumstances. At the same time, many potential buyers are busy coping with their own problems in-house.” Some transactions were also postponed for organizational reasons. Worldwide travel restrictions and stay-at-home orders in numerous countries have slowed down complex international transaction negotiations in particular.
The TMT industry (technology, media and telecommunication) is one sector where the merger and acquisition business was less affected by the coronavirus crisis. It proved more robust with respect to developments in the merger and acquisition business, which led to an above-average level of M&A activities in this sector. Around one fifth of the transactions that took place in the first half of 2020 were attributable to the TMT industry (2019: 13 percent).
Despite the declining merger and acquisition business, the first half of the year still saw a number of larger mergers and acquisitions, with the really major deals in the double-digit billion range failing to materialize. Three transactions stand out in particular and together accounted for more than half of the transaction volume in the first six months of the year: the purchase of Switzerland’s Veeam Software for USD 5 billion by the US private equity firm Insight Partners, the sale of BP’s petrochemicals division to a Swiss subsidiary of INEOS for USD 5 billion, and the purchase of an 81 percent stake in the Portuguese transport infrastructure company Brisa-Auto Estradas de Portugal SA by Swiss Life Asset Managers, the Dutch APG Group and the South Korean National Pension Service (NPS) for nearly USD 4.5 billion.
The first half of the year also saw a high level of involvement by private equity firms, with financial investors acting as buyers or sellers in around 40 percent of the deals. “Despite the somewhat gloomy investment climate and enormous uncertainty, slightly lower valuations and high pressure to invest meant financial investors’ activities did not decline to the same extent as transaction activity on the corporate side,” explains Timo Knak.
KPMG expects both the number of transactions and their volume to pick up again slightly during the second half of the year unless the coronavirus crisis worsens even further, giving rise to even more uncertainties.