Deal Making Is Drying Up --- and It Won't Get Better Soon

The U.S. M&A market was cut in half during the first quarter of the year through March 28, and it is going to get worse before it gets better.

The U.S. M&A market was cut in half during the first quarter of the year through March 28, and it is going to get worse before it gets better.

The U.S. M&A market is going to get worse before it gets better as Covid-19 ravages the U.S. economy.

It’s already pretty bad. U.S. announced deal volume plunged 51% to $252.9 billion as of March 28, according to Refinitiv. Globally, the value of announced transactions fell 28% to $697.6 billion, while the number of transactions dropped 16%, the data provider said.

It’s going to get worse. Mergers could plunge another 50% to 80% in the second quarter as sellers wait to see if prices rebound, according to bankers and private equity executives Barron’s spoke to in an informal survey. Some even think transactions could fall to near zero as the M&A market waits for some sort of clarity, and for the stock market to find a bottom.

“The M&A market typically falls after a major correction in over inflated asset prices,” said Joshua Thompson, head of leveraged finance at law firm Shearman & Sterling.

The times certainly had been good for mergers and acquisitions, with many companies getting solid for high multiples, somes as high as 20 times earnings before interest, tax, depreciation and amortization. Covid-19 put a stop to that 10-year bull run for mergers, as the Dow Jones Industrial Average tumbled to its worst quarterly loss since 1987.

Even that $252.9 billion figure for March mergers is misleading, because the number includes deals that were in process before Covid-19 decimated the U.S. stock market. The real test will come later in Q2 when transactions signed after the advent of Covid-19 try to close. The number of post-corona deals completed will likely be significantly fewer. Their size will also be lower because the market capitalizations of companies have dropped by 30% to 60%. “It’s not a good time to bring a good asset to market,” says Christopher Rile, an M&A partner with Ropes & Gray.

Covid-19 will likely cause problems for the nation’s investment banks. If mergers don’t rebound by the end of 2020, the downturn could result in layoffs. Smart IBs will look to cut pay instead of furloughing people, said Rob Brown, CEO of Lincoln International, a global middle market investment bank. Big bonuses, though, will likely be in short supply.

When the U.S. emerges from the covid-19 recession is unknown. Many hope covid-19 abates, travel returns and business resume operations by June to September. A worse case scenario sees the virus churning through the country, with workers staying home for the rest of the year.

The only sure thing is that the M&A market will return. At some point, distressed assets will start to come to market, said Ropes & Gray’s Rile says. And distressed investors, hedge funds and private equity firms are positioning themselves to take advantage of buying opportunities

Any M&A will likely include companies that need to sell, either because they’re underperforming or the parent doesn’t have funds to help them. Strategics that don’t need debt financing and are looking for scale may be on the hunt. “I think what goes down quickly tends to come up quickly,” Lincoln International’s Brown said . “We were all waiting for an economic correction anyway.”

Just not necessarily one like this.

Write to Luisa Beltran at

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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