It may have been expected that the outbreak of the COVID-19 pandemic would be the death knell for merger and acquisition (M&A) activity but, as outlined by the global practice leader of CFC’s transaction liability team, Angus Marshall (pictured), the reality is a little more complicated.
Looking back to the year before the COVID crisis developed, he noted that M&A activity was distinctly underwhelming in comparison with where it was in 2018, when M&A activity had set records across the spectrum of deal size, sector and jurisdiction. At the beginning of the crisis, he said, there was a lot of doom and gloom regarding the outlook for M&A in the short term.
“And certainly there’s been a material drop in M&A activity but, we have seen certain segments of the market remain resilient despite the economic challenges brought about by COVID-19,” he said. “The lower mid-market, in particular, has proven to be far more robust than we originally expected.
“We usually receive around 15 submissions a day, which was up to 20 submissions in the peak period for M&A and that’s dropped to somewhere between seven and 10 a day. And that figure is in line with the number of submissions we were getting during the US government shutdown in January 2019.”
Marshall and his team have seen first-hand how the challenges facing businesses looking to carry out acquisition activity have been amplified by the crisis.
“A very practical result has been that investors can’t really meet face to face with the management team on potential acquisitions,” he said. “And, although that might seem like a small thing that could be solved through technology, it does have a negative effect on the ability to do deals. And there’s also the fact that lawyers and bankers are now also having to work remotely which just disrupts the momentum that you need to be able to execute deals.”
Perhaps the most relevant question for M&A insurance underwriters was to what extent COVID-19 would impact risks typically covered by M&A policies. Broadly, the market responded with a rationalised approach and a willingness to work with brokers and advisers to address issues affected by the pandemic.
“Uncertainty is death to M&A,” Marshall said, “but at the same time, disruption presents a huge amount of opportunity. And I think we’re moving from a period of uncertainty to a period of disruption. Any ambitious business such as CFC, should view disruption as an opportunity as opposed to a challenge.”
It was with this in mind that the transaction liability team at CFC elected to launch its new transaction liability portfolio solution, he said. What typically drives M&A cycles is the very large deals which are done as a result of abundant capital, and muted growth among corporates who need to buy a company to grow. CFC’s portfolio solution is aimed, however, at bolt-on acquisitions through which corporates and financial sponsors acquire small but complementary businesses relevant to their existing operations or investments.
While there still remains considerable uncertainty, small bolt-on acquisitions are far lower risk than transformative M&A, Marshall said, and with near-record highs of dry powder available to financial sponsors, investment activity is likely to push through the downturn. As such, CFC still felt that the time was right to launch its portfolio solution.
“Once people have figured out what COVID means and how it impacts the process of doing deals, there will be a pivot back to business-as-usual type M&A activity,” Marshall said. “And the lowest risk type of M&A activity that you could possibly do when the economy is less than certain are these very small bolt-on acquisitions.”