The COVID-19 pandemic has principally altered the condition of the United States economy, prompting a significant deviation from the typical amount of business activity seen in the past few years. Many companies have attempted to pivot to recent events through mergers and acquisitions — transactions where a company’s ownership changes or transfers to another business.
A company may merge with another business to form a single large entity, or it may purchase the company for itself and own it entirely as a subsidiary business. Merger and acquisition (M&A) activity can produce incredible benefit or damage to the involved companies. There is potential for growth if the deal represents a great future value, but there is also a risk of decline if the parent company overpays during the agreement.
Effects from COVID-19
COVID-19 and the restrictions taking place nationwide have fundamentally altered recent M&A trends in several ways. Businesses in the hardest-hit sectors such as restaurants, in-person entertainment (concerts, theatres, etc.), and educational services have mostly stopped participating in mergers and acquisitions. Recent decline come as a result of a vastly decreased number of customers.
A significant number of businesses with planned mergers or acquisitions before the COVID-19 period have chosen to halt them for the time being. Many companies have also decided to end their deals indefinitely. Large amounts of debt, massive unemployment rates, and fears of an upcoming recession have slowed sales across the US.
Most US businesses went into the lockdown period purchasing large amounts of inventory. Belief across industries was that the US economy would only continue to remain exceptional. Most companies now lack the money to acquire other businesses. With sales at a fraction of pre-COVID-19 levels, businesses with cash saved are now choosing to pay off inventory. The trend of companies holding excess inventory with little saved cash will take the economy months or years to pay off. It will also delay the return of the typical amount of mergers and acquisitions that take place (roughly 1,000-2,000 per month).
Fears and Priorities Affecting M&A Trends
Uncertainty about a market collapse by additional waves of COVID-19 has led many CEOs of companies who could feasibly purchase businesses not to do so. A majority of executives have instead chosen to focus their efforts on the health of their existing businesses. Markets are waiting to see if the economy returns to normal before making deals that take years to pay off.
Despite the overwhelming concerns that have caused an M&A slowdown, some businesses are maintaining a positive economic outlook. Optimism exists for control of COVID-19 in the short-term future. Select companies have continued to increase their engagement in deals throughout the last six months—much of it due to government stimulus packages, increased Federal Reserve action, and successful COVID-19 vaccine research.
Positive Potential Effects from COVID-19
The US lockdown period has increased the prevalence of undervalued businesses—ones that larger institutions can acquire in sectors minimally-affected by COVID-19. Market sectors least affected by restrictions such as technology development, healthcare, food delivery services, and insurance are pursuing mergers and acquisitions at a fast rate.
For well-adjusted companies, the last six months of COVID-19 have presented an opportunity for companies to purchase businesses in financial trouble for low prices with hopes of making them profitable in the long term. Many business institutions have recently shifted their focus towards merging or acquiring key businesses (typically internet-based) that have grown as a result of the general public staying at home.
The most recent example of this shift during COVID-19 is tech giant Microsoft’s bid for the Chinese ByteDance-owned social networking platform Tik Tok. The deal represents a piece of the much larger trend of healthy corporations pursuing newer, generally riskier high-growth online platforms. Similar situations have played out for Uber, who agreed in July to acquire rival Postmates, for Facebook, who announced it would buy the online moving image library Giphy, and for Verizon, who decided in April to buy the video calling platform BlueJeans.
Fear surrounding the COVID-19 pandemic has lent itself to merger and acquisition activity highly dissimilar to the last decade. COVID-19 has affected businesses throughout the United States and the world in unprecedented ways. A majority of companies chose to stop mergers and acquisitions until the health of the macroeconomy is a guarantee. The current market represents an opportunity for M&A in specific sectors that have profited despite COVID-19 restrictions. Still, the number of mergers and acquisitions taking place in the US market has substantially decreased. This slowdown is likely to remain for at least the next few quarters until the fate of the virus and the US economy become apparent.