Mergers and acquisitions (M&A) activity will continue to be slow as there has been a dip in overall market confidence since the outbreak of the coronavirus.
According to the quarterly investment banking update (Q1 2020) by Evalueserve, M&A advisory has been Impacted by low market confidence.
Since the outbreak of the novel coronavirus, there has been a dip in overall market confidence. As a result, M&A activities are expected to slow down across sectors.
Javier Oficialdegui, Co-Head, UBS Investment Bank had said earlier, “This crisis has hit the vast majority of sectors” some will have to be restructured or completely rethought and this will lead to an increase in M&A activity as weaker players do not survive, public companies move to private and, eventually, activist investors return. This will happen in the first half of next year”.
“In the investment banking industry, the advisory business is more susceptible to uncertain environments and we expect M&A activity to continue to be slow until there is a recovery in market confidence,” the update said.
According to the key highlights in investment banking, in the equity capital markets segment, revenue from equity underwriting across bulge bracket banks increased in Q1 2020. Within ECM, however, in the period, January – May 2020, IPO activity was down 24 percent globally; while global follow-on and convertibles offerings increased 26 percent and 9 percent, respectively, as compared to the same period last year.
The report said M&A activity has slowed down across most of the sectors. There is significant year on year increase in ECM deals in retail and consumer products sectors across all regions.
Healthcare ECM issuances were high, driven by US and APAC regions while tech ECM was up in Europe. Debt issuances were high across all sectors. The bulge bracket investment banks performance saw a weak performance of the advisory
services. These include JP Morgan, Goldman Sachs, Bank of America, Citi, Morgan Stanley, Barclays, UBS, Deutshe Bank, Credit Suisse.
Advisory revenues have seen a decline across almost all the banks. This was due to deal activity getting reduced post COVID-19 outbreak. This decline was offset by increase in underwriting revenues. Equity underwriting experienced a positive growth in first half of Q1 2020, however, towards the end of the quarter markets started deteriorating. Debt underwriting revenues picked up in March with firms raising debt to improve liquidity thereby taking advantage of lower interest rates.
M&A Advisory Firms are increasingly focusing on restructuring, rescue financing, and recapitalization activities amidst lower M&A activity in the current market environment. The time required to realize the revenues from these activities may be longer than expected, but it would help strengthen the existing client relations and develop new clientele.
Many firms with complementing businesses are engaging in cross-divisional collaborations to gain synergies.
“We believe the impact of this pandemic would last for quite some time and result in prolonged uncertainty in the market. Recovery in the investment banking industry is also dependent on various external and uncontrollable factors such as directives from health departments and government policies,” the report said.
The recapitalization of highly levered companies will likely drive equity issuances, as well as de-levering of assets, which in turn, will augment M&A activities.
Firms with diversified capabilities beyond M&A advisory (restructuring, capital markets advisory, etc.) are likely to perform better in other than advisory business; however, these efforts may not be enough to address the near-term weaknesses in the M&A advisory industry.