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Q1 League Table: M&A Volumes Way Off

By David Marcus | Published on April 30, 2020

There was cause for concern about the M&A market in early March. Then came the coronavirus.

Despite growing concern about the coronavirus, deal lawyers gathered in New Orleans on March 5 and 6 for the Tulane Corporate Law Institute as they have every year since the late 1980s. Attendance was strong, though at least for the first drink or two, elbow bumps replaced handshakes at the series of cocktail parties firms held the night before the conference starts.

Blair Effron, a co-founder of Centerview Partners LLC, kicked things off with a market overview. Until Feb. 21, he said, equity markets and valuations were at record highs. Financing markets were robust, and the spread on high-yield debt was within 100 basis points of post-2008 lows. But, he added, CEOs’ economic outlook had dropped steadily in 2019, resulting in very modestly reduced investment.

Halfway through his presentation, Effron turned to the coronavirus, which by March 6 had caused only slight downward adjustments in 2020 economic forecasts, though there was already an expectation that the price of oil would fall by 23%, from $61 a barrel to $47. (As of March 26, a barrel of West Texas Crude Intermediate went for $23.06) Earnings growth, he said, had been falling since May 2019, and even after a two-week decline in stock prices, Effron concluded, “Multiples remain high if adjusted for potential earnings revisions.” Equity market volatility tends to dampen M&A, Effron said before he turned to the 2020 U.S. presidential election.

Things started getting more serious even before most attendees headed back to the newly opened New Orleans airport for their flights home. The morning of March 6, Delaware Chancellor Andre Bouchard issued an order requiring the Court of Chancery to take measures to reduce the risk of transmitting the virus, the first in a series of edicts that ended with Chief Justice Collins “C.J.” Seitz Jr.’s decree on March 22 that the state’s courts would be closed until at least April 15.

On March 9, Aon plc announced its agreement to buy Willis Towers Watson plc for $30 billion in stock, the largest deal of the year so far, but by the next week the M&A market had come to a virtual standstill as U.S. equity markets cratered. Enough Delaware companies worried about preserving cash that four Wilmington law firms put out a memo describing how companies can legally defer paying dividends. With in-person meetings and due diligence impossible to perform for the time being, there could well be only a smattering of deals of any size announced this spring.

But as Effron suggested in New Orleans, the M&A market was showing signs of strain even in early March. According to Dealogic, there were 149 U.S. deals of between $100 million and $1 billion worth a total of $47 billion through March 26, a pace almost 25% off of 2019 and one that would result in the lowest deal and dollar volumes since 2009. Deal and dollar volume for that category of transactions in March was less than 60% of what it was in the first two months of the year.

In every year since at least 2008, those middle-market deals have accounted for at least 76% of deal volume, so the first-quarter drop in activity is a bad omen. PE activity also fell off substantially in Q1, with 17 U.S. deals of $100 million or more worth a total of $35 billion–healthy activity by dollar volume, but on pace for the lowest deal volume since 2009–a year that may end up looking good in comparison with 2020.

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