COVID, as I predicted many months ago, is taking a toll on M&A. In the first half of 2020, the value of mergers and acquisitions fell 50% from the year-earlier period to the lowest level since the depths of the euro-zone debt crisis.

Source: Bloomberg
Data shows the value of pending and completed M&A applied to targets in each region. 2020 figures are through June 28.

The Americas have realized the sharpest fall with deals value down 67% in the first half. Every major industry has been hurt. However, the financial sector fared better than most because of Aon Plc’s $30 billion offer for Willis Towers Watson Plc and Morgan Stanley’s proposed $13 billion acquisition of E*Trade Financial Corp.

EMEA was down 31% and Asia Pacific was down 7%.

As has been said before, the COVID situation is a public health crisis. Until we deal with the public health issue, everything else will suffer. The M&A numbers reflect this with Asia Pacific currently leading with the best response. EMEA suffered initially but is recovering, while the Americas, with the U.S. and Brazil failing in their response, has fallen the most.

U.S M&A activity in Q2 2020 continued to decline as COVID remained an unrelenting problem in North America, especially in the US. North American M&A activity during this period was $336.8 billion across 2,025 transactions. Currently, the US recovery is more of a “W” than a “V”, which threatens to further drag down M&A activity.

Nevertheless, certain sectors, namely tech, and healthcare continue to have a stable deal volume, as many companies in these sectors have benefited from COVID and are opportunistically seeking M&A transactions. However, in areas such as oil & gas, many companies are completing deals just to survive. 

Due to COVID, buyers and sellers are struggling with a lack of accurate earnings and cash flow forecasts, causing parties to avoid deals. Further, cash is key, and survival is not running out of cash. Thus, unless companies have large cash piles or can use their paper, deals will be further limited.

While both the U.S. and Canada confirmed their economies entered recessions during Q1, Canada has since emerged from its shortest recession on record due to its effective COVID response. The prospects for the U.S. remain bleaker with rising COVID cases negatively impacting the country’s economic outlook. Furthermore, many of the states that opened up too early, e.g., Florida, Texas, Georgia, have seen dramatic increases in cases and are shut back down.

Currently, the International Monetary Fund is forecasting an 8% decline in GDP for the U.S. in 2020. With no end in sight for the pandemic in the U.S., which has the most cases and deaths from the virus globally, that may be optimistic.

The outlook for M&A thus remains dim.

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I recently saw a comment from an old business colleague of mine on Facebook which effectively said that until we get back to selling face to face, the economy will not recover.

While that might be true, the failure to deal with COVID in the U.S. is leading to accelerating cases and deaths from COVID. While some steps to slow the virus are being instituted by various governments, the increasing caseload is bringing the disease closer to more and more people. As a result, more and more people are worried and not interacting with others more than absolutely necessary. This behavior is slowing down the potential recovery.

So the question is “How long will we live with this?“

I said for some time that we will be like this until this time next year. However, a recent article quoted Ezekiel (Zeke) Emanuel, vice provost for global initiatives and chair of the Department of Medical Ethics and Health Policy at the University of Pennsylvania, saying that a full return to normal isn’t likely to happen until November 2021. While Emanuel says he is an optimistic person, he believes that the November date is how long it will take for an effective vaccine distributed widely enough to stop the spread of COVID-19.

Further, he expects the toll in the U.S. to reach 250,000 by the end of 2020. However, he also believes that non-pharmacological interventions i.e., social distancing, wearing masks, avoiding crowds and enclosed spaces, and staying away from people who are coughing, sneezing, singing, or yelling are working. Besides, Emanuel thinks it is almost inevitable the U.S. is going to have a second wave that pops up in October or November of this year when we’re all going inside. 

His advice is: 

Companies

Until we reach a point where there is a vaccine or herd immunity, corporate employees should continue to work from home as much as possible because enclosed spaces and prolonged exposure to other people increase the likelihood of transmission. For frontline workers and others who cannot work remotely, including employees at retail stores, a detailed protocol must be implemented to protect both workers and customers – such as mandatory masks, plexiglass dividers, and regular sanitizing of hands and surfaces. 

Stores

Stores have much to consider, e.g., can they put some of their merchandise outside to limit the number of shoppers inside? Can they open windows or doors to help air circulation?

Emanuel believes the use of face masks will be necessary, but he questioned the effectiveness of conducting temperature checks at the door. Instead, use symptom screening questions daily for employees, i.e., whether they are experiencing shortness of breath. Testing for COVID-19 more than once a week for asymptomatic employees is wasteful and creates a false sense of security. Instead, emphasizing good, routine personal hygiene – especially washing hands — and store cleaning is reassuring for both employees and customers. While more research is needed to determine whether clothing, shipping boxes, or store surfaces could transmit the virus, Emanuel said these are likely not the main modes of transmission.

Concerning a store closing its doors, the answer is dependant on so many factors; it is too abstract to say.

Public Transportation

No. Use your car, walk, or bike. Emanuel is an avid bike rider who rides his bike in the snow.

Air travel

Avoid it. Airplanes do have sound air filtration systems, but they cannot protect against sneezes or other exhalations from fellow passengers two rows away from you or in the aisle.

So what does this mean for most of us?

Whatever processes we have taken to manage in the current environment is going to be the way we operate for another 16 months. Thus we have look at these processes and rather hope for the “old” normal return, look at them through the lens of continuous improvement.

• How do we become more effective in operating in this environment?
• What can we expect from our sales team and can we meet any increase in demand?
• If we were designing a system from scratch and with the luxury of time, would we do it this way?
• How do we ensure that our employees remain healthy?
• How do we ensure that our employees’ mental health is ok?
• How are our customers and suppliers are doing? Should we be concerned?

It is key to take time during this period to think Upstream and work on these issues with your team. As I have said before, Darwin said that those who survive are best at adapting to their environments. If we don’t adapt we die. 

During a pandemic that applies to not only our business but ourselves.

Finally, Emanuel said that he relies on Trust for America’s Health, a nonpartisan policy, research, and advocacy organization for comprehensive information on the pandemic. I am heading there next.

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