The COVID-19 pandemic has seemingly affected every corner of the commercial world, from retail to aviation. As consumer consumption rapidly declined, thousands of businesses were forced to save money to continue to survive in the current economic climate, focusing on their internal health as opposed to external ventures. This has meant laying off or furloughing millions of workers, restructuring supply chains and seriously cutting back commercial operations. Furthermore, private equity has spent more of their time focusing on their existing portfolios rather than investing in new ventures. As a result, M&A activity had taken a serious hit. M&A levels in the US fell by more than 50% in the first quarter, where in March 2020 M&A activity had reached a near standstill. Notably, in November of 2019, luxury giant LVMH revealed their £12.6 billion takeover of Tiffany & Co. and in February of this year, Sycamore Partners agreed to acquire a 55% share of Victoria’s Secret from L Brands. However, as a result of the restrictions of the COVID-19 pandemic, both takeovers were halted, with L brands terminating their initial takeover by reaching a mutual agreement with L Brands, luckily avoiding litigation, and LVMH retracting their initial offer after Tiffany’s & Co.’s share price tumbled earlier this year. These are just two examples of major retractions in the M&A world that have happened as a result of the pandemic.
However, the months of June and July bring some positive news. The FT has reported on a series of ‘blockbuster deals’ that have significantly boosted M&A activity, with eight deals, worth more than $10 billion, being signed in the past six weeks. In some cases, businesses have decided to resume previous corporate transactions, catching up on the backlog of M&A deals that were set to occur before the events of the pandemic. The increase in investments comes from the recovery of share prices, as this increases investor confidence that their major takeovers will be profitable and worth the risk in the long run. Such deals include the $21 billion sale of Marathon Petroleum’s Speedway petrol stations business to Seven & I Holdings, a deal that had also been halted due to the COVID-19 pandemic. Initially the Japanese retail company previously failed to agree on a price for the transaction, but has now moved ahead with the acquisition, thus capturing growth outside their domestic market, which is also reported to be shrinking. This is an implication that corporations are looking to expand their businesses again and are feeling confident enough to make such risky investments.
M&A activity is a primary indicator for how we understand and measure the health of the commercial world. While such increases in activity seem to be initially positive, it is, in fact, unclear whether the resurgence of the M&A environment is as positive an indication as one may have hoped. These deals have arisen in part because of the looming recession, the official announcement of which occurred on August 12th, following the economy contracting by 20.4%. Companies seem to be bracing themselves for the economic downturn, looking to build scale and resilience. Additionally, fears of a second wave occurring across Europe appear to be mounting. Spain in particular is testing people’s confidence, and parts of the UK have been issued fresh lockdown restrictions pre-empting a second wave as well. Furthermore, countries such as Germany are sending students back to school, adding an additional concern to the emergence of a second wave. Such repercussions would seemingly mirror the first, with the economy and certain sectors taking another blow to their productivity and earnings. Therefore, while ordinarily the surge in M&A activity may be interpreted to be indicative of a healthy economy, in this case, businesses seem to be acting in order to shield themselves from the instability and uncertainty that lies ahead.
So, what does this mean for lawyers?
Corporate practice areas naturally took a serious hit due to the COVID-19 pandemic. As expected, firms saw a reduction in the demand for M&A activity, while areas such as financial restructuring and insolvency saw a significant increase. The current rise in mergers and acquisitions are sure to be beneficial for firms’ corporate practice areas, however, it is likely that firms will be sure to not get too comfortable with this current environment, given the predicted state of the economy. Regardless, there is a huge amount of uncertainty around what is to come in the following months, and as a result corporate lawyers will be turned to by corporations to advise and guide them through complex legal procedures. It will be important to keep an eye on financial institutions as well and observe how they navigate themselves through this recession. There are positive reports that financial institutions, such as banks and private equity firms, have established a serious resilience resulting from the last global financial crisis. Perhaps financial services will continue to use M&A to their advantage, even in the murky depths of a national recession. Only time will tell.