In this whitepaper, we will discuss the impact of Covid-19 to the global M&A deal volume and near-term post-covid M&A trends.
Find the PDF version of this White Paper below.
Written by:
Beatrice Occhetti
Yiyang Lu
Table of Contents
1. Introduction
2. Definition of M&A
3. Pre-Covid M&A Market
4. Impact of COVID
5. Post-COVID M&A
5.1 Optimistic market sentiment
5.2 Evolution in M&A Focus
5.3 Stellantis N.V. Deal
6. Conclusion
7. References
1. Introduction
During the past two and a half years, Covid-19 has drastically reshaped our private and professional lives. Practically all of the existing enterprises have suffered from decline. Many have restructured and modified their business models extensively to survive the crisis. The shutdown of the global economy has sharply reduced the span of action of the M&A market in 2020, while they have flourished again and lived a roaring year in 2021 following the easing of pandemic regulations worldwide. In this whitepaper, we will discuss the impact of Covid-19 to the global M&A deal volume and near-term post-covid M&A trends. We will also focus on the Stellantis deal of 2021, a megadeal that crossed the pandemic and landed successfully in 2021.
2. Definition of M&A
M&A (Mergers and acquisitions) is the expression traditionally used to describe the consolidation of companies or assets. This happens by means of different types of financial transactions, among which the most common are purchase of assets, consolidations, mergers, acquisitions. The term M&A is also referred to the portion of financial institutions that work in this business.
The words "mergers" and "acquisitions" are often named together however they have a different meaning. When an acquisition takes place, one company purchases the shares of the other. On the other hand, in a merger, two companies combine in a new legal entity. However, a deal can be considered a Merger or an Acquisition also depending on how friendly or hostile the relationships between the companies are. Unfriendly takeover deals, in which target companies are not willing to be purchased, need to always be considered acquisitions.
3. Pre-Covid M&A Market
For the past two decades, M&A market has seen an oscillating trend.
Focusing on the last three years, M&A activities decreased globally during 2019, when compared to the previous year. However, notwithstanding the declining trend, 2019 scored one of the highest levels of activity the latest decades. During the year, deal value reached USD 4.2 Trillion.
The biggest deal was the acquisition of the US biopharmaceutical manufacturer Celgene from American Bristol-Myers Squibb Company for USD 74.0 billion. The second placed transaction was Saudi Arabian Oil Company picking up Saudi Basic Industries Corporation for USD 69.1 billion. In third place is the USD 63.5 billion acquisition of Irish pharmaceuticals firm Allergan from American AbbVie. US targets were frequently in the top deals of 2019. Companies from Saudi Arabia, Ireland, the Netherlands, China and UK were also frequently targeted in the top 20. However, the global economic uncertainty, and the trade tensions between the US and China, influenced negatively the value of 2019 transactions.
In 2020, the global M&A activities were negatively influenced by the Covid-19 spread around the world. The global deals values were down in the range of 10% compared to previous year. Instead, in 2021 M&A flourished to the record value of USD 5.9 Trillion, triggered by worldwide Economy raise.
4. Impact of COVID
Inevitably, the impacts of the pandemic extended to the world of M&A, with companies shutting down and employees locked away at home. During the year of 2020, global M&A market saw a decrease of 20.4% in compare to 2019 in transaction value according to S&P Global. LATAM and NA were hit the most by the pandemic, with a 39.3% and a 30.2% decrease respectively.
Due to the many restrictions imposed during the COVID era, we saw a strong disruption on ordinary operation of companies across industries. Buyers had a reluctant sentiment towards closing ongoing transactions in concerns of material adverse effects caused by the pandemic. Many industries, such as aviation, hospitality, and Oil, entered immediately into survival mode. Companies turned to defensive M&A to either salvage value or safeguard existing markets. Some other companies in more resilient industries saw the pandemic as an opportunity to enter into offensive M&A to transform their business and invest in the future. Some of the biggest offers in 2020, such as Xerox’s $34billion bid to HP, was dropped in focusing on coping with the coronavirus situation, and Boeing suppliers Hexcel and Woodward’s pending $6.4billion transaction was terminated too due to the challenges they faced at the time. Despite the repressed deal volume during the year, the pandemic has simultaneously built the base for a strong rebound as soon as the pandemic eases up.
5. Post-COVID M&A
5.1 Optimistic market sentiment
Despite the hit the M&A market suffered in 2020, the potential of the market never faded. As the impact of the COVID pandemic diminishes in 2021, business activities have revitalized and the M&A market regained its momentum. During the year of 2021, global M&A transaction value reached 5,857 billion U.S. dollars, in compare to 3,566 billion U.S. dollars in 2020. Despite the inflationary pressure around the world, the market sentiment has soared as COVID related regulations start to ease across the world. In a survey conducted by Deloitte, about 92% of corporate executives and PEIs (Private Equity Investors) believes that the M&A deal volume will increase or stay the same in 2022. Given the spectacular result of 2021, the M&A market sees a bright future in the year to come.
5.2 Evolution in M&A Focus
The M&A landscape has experienced a large shift in its focus. The pandemic has exerted immense pressure on corporations. With plants shut down and supply chain broken, production and sales hit rock bottom in 2020. Companies were thus presented with an opportunity to reposition and jettison underperforming operations and subsidiaries in order to relief stress and preserve their core business. Uber, for example, sold its autonomous driving unit to Aurora Innovation. The transaction allowed Uber to focus more on its profitability and unload an expensive venture that can potentially drag the growth of its core business. According to Deloitte, about 57% of executives have engaged in divestitures during the pandemic, and 32% are considering divestiture now. The outlook for future M&A transactions will see a substantial rise in divestiture activities.
The talk of environmental, social, and governance (ESG) factors in the financial has also accelerated during the pandemic. According to PwC, more than half of its surveyed general partners and limited partners in private equity had refused to enter an agreement or turned down an investment opportunity due to ESG concerns. A Deloitte survey showed further that over 70% of financial institutions incorporate ESG factors into their valuations and reevaluated their existing portfolio adjusted to ESG grounds. As investors committing increasingly to ESG, especially in reducing GHG emissions, more capital will be pumped into the transition of green energy and technologies, creating an immense opportunity for future M&A deals. The merger between PSA Group and FCA Group was one of the most notable deals in 2021 that created Stellantis N.V., which aims to provide sustainable transportation solutions of tomorrow.
5.3 Stellantis N.V. Deal
In 2021, one of the most remarkable M&A deals was the merger that took place in the Automotive sector between Fiat Chrysler Automobiles N.V. (FCA) and Peugeot S.A. (PSA). The merger created the new Netherlands-based Stellantis N.V. Stellantis shares are trading on Euronext in Paris, on Mercato Telematico Azionario in Milan, and on the New York Stock Exchange, under the ticker symbol “STLA”. The merger was valued at €52.0 billion, equivalent to the Equity of the new company at its foundation. This megadeal represented nearly 1% of total M&A activity by value in 2021.
The two companies entered into talks back in 2019 in joining force to build a world leader for a new era in sustainable mobility. The merger aimed to create the 4th largest OEM by volume and 3rd largest by revenue in the automotive industry globally. With the shift in investor focuses towards ESG and consumer preference to more sustainable mobility solutions, the merged entity allows the two groups to elevate their growing capabilities by combining their resources in sustainable mobility technologies such as electrified powertrain, autonomous driving, and digital connectivity.
As the pandemic hits, this negotiations and updates were put in halt. No further official updates were provided by the deal parties until September 2020, where the two companies released an amendment to their original Combination Agreement to “address the liquidity impact on the automotive industry of the COVID-19 pandemic while preserving the economic value and fundamental balance of the original Combination Agreement.” The amendment kept the original 50/50 agreement. FCA Group agreed to distribute €2.9billion less in special dividends before closing for a stronger Stellantis cash position. Along with some other minor changes in equity structure, other terms weren’t affected.
The merger was expected to bring an annual run-rate synergy of over €5 billion. FCA Group brought to Stellantis its exciting and historical brands Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Jeep, Lancia, Ram, and Maserati, while PSA Group contributed with its iconic brands Peugeot, Citroën, DS, Opel and Vauxhall.
In the 2021 Annual Report recently issued, Stellantis published the financial results of its first year of activity. The Income Statement showed Consolidated Net Revenues at € 152.1 billion, with a growth of 14% compared to the 2020 pro forma combined Revenues of FCA Group and PSA Group. Net Profit was at € 14.3 billion, Net Profit Margin at 10.6%. In 2021 Stellantis had combined shipments of 6,049,000 vehicles, including JV’s; at the year end, the Company had 282,000 employees. The merger has so far been proven a success.
6. Conclusion
The record-breaking growth in M&A deals in 2021 succeeding the slump in 2020 suggests that the M&A market was profoundly affected by the Covid-19 crisis, but the macro trend remains optimistic despite the fluctuation. During the pandemic, many business sectors have suffered from sharp reduction of their sales and profits, and they have not yet fully recovered to pre-Covid levels. Banking sector, in the meantime, has also suffered from disruption of deal-making and negotiation processes. In these circumstances, many M&A activities Many others, in the meantime, have moved from the concept of “Improving a corporate business” to the concept of “safeguarding existing markets”, where synergies of costs can allow certain companies to overcome the difficult period.used the pandemic as an opportunity to restructure and optimize their operations to safeguard future growths.
This need becomes even more stringent in industries such as automotive. The overall trend in today’s world requires automakers to shift towards electrification and carbon neutral processes, where requires huge investments for innovation that can lead the market. In the case of Stellantis, the new company is pursuing synergies able to bring a cost saving of € 5 billion per year through synergy compared to the operating costs of the two former entities, FCA Group and PSA Group.
In 2022, it is unlikely that the world will see a boom as spectacular as 2021 in the M&A market. Nevertheless, the market is expected to follow the positive trend and plenty of M&A opportunities will arise in the months and years to come.
7. References
Choy, Lawrence. “Global M&A by the Numbers: 2020 Recap.” S&P Global Market Intelligence, S&P Global, 10 Feb. 2021, https://www.spglobal.com/marketintelligence/en/news-insights/blog/global-ma-by-the-number s-2020-recap
“FCA and Groupe PSA Amend Their Combination Agreement to Further Strengthen Stellantis' Opening Capital Structure.” Stellantis, 14 Sept. 2020, https://www.stellantis.com/en/news/press-releases/2020/september/fca-and-groupe-psa-ame nd-their-combination-agreement-to-further-.
“The Future of M&A 2022 M&A Trends Survey - Deloitte.com.” 2022 M&A Trends Survey: The Future of M&A, Deloitte, Jan. 2022, https://www2.deloitte.com/content/dam/Deloitte/us/Documents/mergers-acqisitions/us-deloitte -2022-mna-trends-report.pdf.
“Global M&A Review 2019 - Bureau Van Dijk.” Global M&A Review 2019, Moody's, 2019, https://www.bvdinfo.com/en-gb/-/media/blog/global-ma-review-2019.pdf.
“M&A And Covid-19 Charting New Horizons - Deloitte.” M&A And COVID-19: Charting New Horizons, Deloitte, 2020, https://www2.deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/COVID-19/gx -COVID-19-Mergers-Acquisitions-Charting-New-Horizons.pdf.
M&A Report 2022, Bain, 2022, https://www.bain.com/insights/topics/m-and-a-report/.
PricewaterhouseCoopers. “Global M&A Industry Trends: 2022 Outlook.” Global M&A Industry Trends, PwC, 2022, https://www.pwc.com/gx/en/services/deals/trends.html.