The Covid-19 M&A Tsunami: Causes and Characteristics

We are experiencing the biggest year for global M&A ever. Companies are relentlessly looking for potential targets while re-examining their business strategies. With healthy macroeconomics drivers and CEOs’ confidence through the roof, the pace is hectic and remote work has been a strategic accelerator. Corporate lawyers are gasping for air, and employers across the spectrum of M&A, divestitures, and capital markets are scrambling to hire experienced professionals. Some in large law firms are even worried that the boom in hiring resembles the housing bubble originated by the subprime mortgage market.

According to Refinitiv data, M&A activity worldwide totaled $4.4 trillion between January 1 and September 30, 2021. It’s the strongest opening since recordings began in 1980 and a 92% increase compared to the previous year. The tech, healthcare, and energy sectors are under the spotlight. Software deals are becoming more and more crucial, and companies are accelerating the transition to a “green future.” Goldman Sachs earned $17.7 billion in the first nine months of 2021, making it the bank’s most profitable year ever, even without considering earnings from October to the end of December. The records are piling up month after month, lots of capital is moving, and players are constantly looking for opportunities.

While in the past, especially before the 1970s, M&A deals were mainly friendly and financed by cash or equity, nowadays sellers and buyers have a myriad of options, and navigating through them can be a headache. The current M&A boom is characterized by a high demand for private equity and a rebound in SPAC acquisitions.

Transaction cycles can be explained through different drivers. U.S. M&A activity generally comes in “waves,” and it seems that we are currently undergoing a tsunami after the economic decline in the opening months of 2020. To understand how Covid-19 impacted M&A activity, we can identify four main drivers by extrapolating M&A waves and trends: the regulatory landscape, access to liquidity, stock market performance, and emerging strategic needs.

Interest rates are low, and the stock market is performing exceptionally well overall. The pandemic has shown weaknesses and created new necessities, such as in digital channels, supply chain links, and operating models. At the same time, many players have been left severely wounded with declining revenues and financial distress, leaving them open to aggressive takeovers or forcing them to divest and optimize.

On the other hand, the Covid-19 pandemic remains remarkably unpredictable. Structural macroeconomic issues seem to constitute sizable wave-blocking elements. In particular, supply chain fallout and inflation are at the center of media attention. The Biden administration is scaring players with its antitrust policies, and the SPAC rebound could attract stricter regulatory scrutiny. With foreign direct investment regulators adding more uncertainty, the overall regulatory environment paints a scary picture.

Assessing the duration or outcomes of the current M&A surge and economic recovery is nearly impossible without enormous margins for errors. Nonetheless, one factor is worth looking at: CEO confidence is still sky-high. It’s essential that leaders in charge of navigating corporate strategy and with the final say in M&A decisions remain optimistic. In the PwC 24th Annual Global CEO Survey (2021), when asked about their prediction on economic growth for the year, 76% of CEOs expected growth and less than 15% a decline. Concerns about the health emergency and macroeconomic obstacles do not seem to overly impact the expectations of key players.

On November 11 and 12, the Berkeley Forum for Corporate Governance hosted some of the most prominent and influential figures in corporate law in San Francisco. During their panels, the speakers agreed near unanimously that current market trends in M&A activity are unlikely to cease or reverse by next year. As Anu Aiyengar of JP Morgan said, “M&A is a confidence game.” As long as the players, including CEOs, sponsors, and advisors, feel good about the environment, they will continue to play.

Disruptive events can be followed by innovation and prosperity. This wave could lead to productive and sustainable economic growth, supposing that players are not just reacting to exogenous incentives but strategically planning for the future. It also assumes that macroeconomic obstacles will be short-lived, and the negative effects of Covid-19 will eventually subside. These are good times for those curious about change, and we should keep an eye on how the global M&A scene is reshaping.