A Long And Winding Road To M&A Recovery

A long and winding road to M&A recovery – According to new Q2’20 S&P M&A Report

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Q2 2020 hedge fund letters, conferences and more

Many Steps Are Needed Before A Recovery In The M&A Market

The M&A market has taken steps toward a recovery, but many more are needed before a pickup in activity fully hits its stride. During recent earnings calls, several investment bank executives noted how their clients’ CEOs are starting to consider deals. But it is still unclear when that will lead to a meaningful uptick in announced M&A activity, which on a deal value basis was down 90.3% year over year in the U.S. during the second quarter, according to S&P Global Market Intelligence’s latest M&A and equity offering report.

Lee Ainslie’s Maverick Fund USA enjoyed its “strongest quarter in the fund’s history” during the three months to the end of June. According to a copy of the firm’s second-quarter letter to investors, which ValueWalk has been able to review, Maverick Fund USA gained 18% in the second quarter. Following this performance, the fund was Read More

Key findings below from S&P Global Market Intelligence’s Q2 M&A and Equity Offerings Market Report:

  • US knocked from its M&A perch – With the total value of M&A deals slumping 90.3% year over year, to $46.56 billion, the U.S. lost its spot as the perennial leader in M&A activity in the second quarter.
    • That aggregate deal value put the U.S. in the No. 2 spot behind China, which generated a total transaction value of $71.13 billion.
  • Pandemic can’t stop equity issuance – Companies hard-hit by the pandemic along with those least affected by the crisis were able to execute equity deals, and that led to global issuance increasing 34.7% year over year to $193.64 billion in the second quarter.
  • U.S. IPO activity also jumped in the second quarter thanks in large part to deals from the financial sector, which accounted for about half of the activity.
    • Of the 52 U.S. IPOs in the second quarter, 26 came from the financial sector and raised $10.92 billion in aggregate.

Greater Interest In M&A Deals

  • Outlook – Investment bank executives have said their clients are showing greater interest in M&A deals, but it could still take a few quarters before the recovery sets in.
    • The fallout from the pandemic is still giving CEOs less confidence about the economic outlook.
    • A potential driver for M&A is financial sponsor activity. Private equity firms have plenty of dry powder, and they could look to take advantage of distressed situations.
    • Still, equity issuance should slow as activity normalizes since companies rushed to the market to execute deals after stock prices rebounded in the second quarter. Also, the third quarter typically sees a seasonal slowdown in deal activity, and this typically leads to a reduction in transactions such as initial public offerings.
    • But the capital markets remain open. Issuance activity in the healthcare sector has remained strong in July, and some of the fund raising could lead to strategic initiatives.
    • Given uncertainty in how the health crisis can impact the economy, executives may want to target smaller-ticket M&A transactions that could help them add on to their businesses as opposed to larger, more transformational deals. The lack of bigger deals should keep the total value of M&A deals depressed.
    • The exceptions could come in healthcare and technology. Healthcare and technology are two sectors in which investment bankers cite as being potentially active for M&A in the current environment. The thinking is that those sectors have the least amount of revenue headwinds as a result of the pandemic.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. – Email: jacob(at)valuewalk.com – Twitter username: JacobWolinsky – Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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