Mergers & Acquisitions 2020: USA Chapter
This article first appeared in GLI – Mergers & Acquisitions 2020, published by Global Legal Group.
Overview
2019 M&A Numbers
Following the uptick in overall global M&A volume in 2018 over the previous year, the approximately 36,000 transactions that closed globally in 2019 represented an 8% drop in number of transactions from the previous year, while the $3.1 trillion worth of transactions that closed in 2019 represented a 14% drop from 2018 in deal value.
In contrast, the domestic M&A market continued to be robust, with the overall value of transactions based in North America exceeding $2 trillion as it has for the last few years. In keeping with the trend in recent years, this volume level was again aided by a large number of “mega-deals”, including two deals valued in excess of $70 billion each: Bristol Myers Squibb’s acquisition of Celgene Corporation; and the acquisition of Raytheon Company by United Technologies Corporation. Indeed, of the 11 largest global transactions announced in 2019, nine involved both a U.S. target and U.S. acquiror and those nine deals accounted for approximately 23% of the overall value of domestic M&A activity. Transactions in excess of $500 million constituted roughly 75% of the aggregate deal value of M&A activity while accounting for slightly more than 10% of the number of total transactions. This activity was significantly driven by large-scale deals in the healthcare and information technology (IT) sectors. The median transaction size in North America was $76.4 million, a $16.4 million increase from 2018.
Overall, inbound investment in the United States witnessed a 16% decline in total deal value and a 1.2% decrease in the total number of deals in 2019 compared to 2018. Macroeconomic deceleration and political tension both have a role to play. In particular, isolationist rhetoric and trade disputes have continued to dissuade potential Chinese buyers from purchasing U.S.-based assets, as well as heightened scrutiny of foreign investments in the United States by the Committee of Foreign Investment in the United States (CFIUS). 2019 marked the third straight year of decreases in cross-border transactions with China. Chinese acquisitions of North American targets experienced significant declines from 2018 to 2019 of 60.4% and 81.6% in number and value, respectively.
Similarly, inbound investment levels from Canada and Europe have declined. Uncertainty surrounding the negotiation of the United States–Mexico–Canada Agreement (USMCA), set to go into effect in July 2020, likely impacted the flow of Canadian investment, while the uncertainty over the terms of Brexit in the United Kingdom and much of the European Union has had a negative ripple effect on Europe’s appetite for overseas investing. The sustained strength of the dollar and U.S. equity markets that were high for much of the year have also served to make inbound U.S. acquisitions more expensive. Canada remained the leading nation for inbound M&A activity in 2019, followed by the United Kingdom and France as measured by aggregate dollar value and by Japan and the United Kingdom as measured by the number of transactions.
Although the end of 2019 saw continued anxiety regarding an anticipated economic recession, the arrival of COVID-19 in the first quarter of 2020 has disrupted all projections. M&A activity in North America in the first quarter of 2020 reached $400.8 billion dollars, representing a 25.1% decline from the first quarter of 2019, while the number of closed transactions increased slightly to 3,169, representing a slight 2.6% gain over the same period. It is likely that a very significant number of the transactions entered into or closed in the first quarter were prior to the global awareness of the severity of the public health threat presented by COVID-19. The decline in the number of multi-billion-dollar deals directly resulted in a dramatic drop in deal value; the total value of M&A deals in excess of $1 billion was $132.8 billion in the first quarter of 2020, marking the lowest figure since the first quarter of 2014. In addition to an immediate focus on stabilising companies, amending existing debt facilities for a difficult period ahead, assessing the eligibility of companies for governmental stimulus packages such as the U.S. Coronavirus Aid, Relief, and Economic Security Act (CARES Act), undertaking cost-cutting measures and navigating workforce issues arising from shutdowns and quarantines, the diminished appetite of financial sponsors for larger deals played a role in declining M&A mega-deals; such deals are typically too large for a single private equity firm and club deals are logistically more complex to arrange. Despite a few bright spots, M&A multiples appear to be deflating, with the rolling four-quarter median falling from 10.1× in the last quarter of 2019 to 9.8× in the first quarter of 2020. COVID-19, coupled with lower CEO confidence and potential future tightening of the credit markets (although given the significant recent growth of credit funds and other structured alternatives, this risk may be less likely now than in the last downturn), are expected to accelerate this decline.