• Quintin Hobbs

M&A activity to pick up in H2 as managers look beyond COVID-19 crisis

Business leaders across the world are looking beyond the immediate impact of COVID-19 on supply chains, revenue and profitability as they expect a significant increase in M&A activity in the second half of 2020 according to the 22nd Edition of the EY Confidence Barometer.

Quintin Hobbs, Transaction Advisory Services Partner at EY South Africa, said that almost three-quarters (73%) of more than 2900 global C-Suite respondents to the survey, expected COVID-19 to have a severe impact on the global economy in the form of supply chain disruption, as well as declining consumption.

“With just under half of global business leaders (49%) reporting profit margins that are either the same or lower than two years ago even before the current crisis, the vast majority of companies (95%) are bracing for further downward pressures on margins as the global economy slows.”

Looking at South Africa, he said that the economic impact of COVID-19 was severe. Many corporates and whole sectors of the economy such as tourism, transport, banking are likely to face significant financial distress from business impacts.

EY has noted a dramatic slow-down in local M&A activity with almost all corporates, as well as Private Equity (PE) funds, pausing transactions until there is some degree of clarity.

“South African corporates are now focused on a range of short term actions to protect the balance sheet and capital, including accessing additional funding, stopping expansion projects, and cost reduction.

“We therefore expect a significant increase in M&A activity, and particular distressed M&A in the second half of the year driven by weak balance sheets as companies offload businesses.”

He added that the South African government has limited fiscal ability to implement the types of stimulus packages we have seen in other countries, owing to the high government debt to GDP ratio coming into the crisis.

“Globally, the human cost is the most tragic aspect of this crisis not only in terms of the lives lost, but also the number of livelihoods at risk. As business leaders respond with urgency to the unprecedented impact that COVID-19 is having globally, workforce welfare and job preservation will be at the top of their minds.

“There is no playbook for this situation and the C-Suite is reconfiguring and readjusting its response in real-time as events evolve rapidly. COVID-19 has created new vulnerabilities and unforeseen challenges. For most companies, the full impact on revenue and profitability across value chains are still highly uncertain.”

The EY Confidence Barometer also showed 54% of respondents expect a ‘u’ shaped recovery period of slower economic activity extending into 2021, 38% see a ‘v’ shaped recovery and a return to normal economic activity in Q3 this year.

Just 8% foresee an ‘L’ shape recovery – a sustained recession period until economic activity returns in 2022.

With the majority of companies assuming a recovery in the medium-term, the intention to actively pursue M&A in the next 12 months remains at the elevated levels (56%) seen throughout this current deal cycle.

As a result of COVID-19, global executives say they will focus more on a target’s business resilience when evaluating a transaction (38%) and are prepared to see valuations come down (39%).