The “art” of deal-making has become a pretty tough sell this year.
Rainmakers in the global mergers-and-acquisitions business saw the tally of completed deals plunge to $1.11 trillion in the year’s first six months — about half of the volume seen during the same period of 2019 — for the worst first half in at least 15 years, according to Dealogic data.
After all, how does one go about buying or selling a company after a pandemic has littered the globe with shuttered businesses, travel bans and uncertainty?
Harris Arch, DuPont Capital Management’s lead portfolio manager for the firm’s merger arbitrage strategy, said that even though the sharp, mid-March credit freeze has passed and the reality of negative corporate earnings has sunk in, the pandemic still means challenges when it comes to the M&A basics.
”We’ve heard from bankers, on calls, of due diligence being conducted by drones,” Arch told MarketWatch, referring to the typical process whereby interested buyers would go out and “kick the tires” of a prospective business before making any offers. Now it’s become yet another task taking place in the virtual world.
And for transactions that get beyond the “browsing” phase to an actual agreement, parties have been boning up on what events could morph into deal-breakers in the months before a transaction can be completed, Arch said, including adding specifics around COVID-19 fallout, not just generic warnings of a “pandemic,” that could materially impact a business.
In other words, after several high-profile transactions fell apart, the new playbook means thinking about the unthinkable.
L Brands Inc . /zigman2/quotes/202062875/composite LB +0.26% and Sycamore Partners in May agreed to walk away from their pre-COVID plans to take Victoria’s Secret private, after the lingerie seller shut its U.S. stores and furloughed many of its workers in March in response to the pandemic. More recently, Simon Property Group Inc. /zigman2/quotes/209746667/composite SPG +1.01% in June said it was ending its deal to buy a fellow real-estate investment trust Taubman Centers Inc . /zigman2/quotes/209899203/composite TCO +0.26% , claiming in court that there was a breach by Taubman in terms of its failure to mitigate the pandemic’s impact.
Taubman’s lawyers responded in court, saying that Simon knew “a pandemic was raging in the world,” and called the breakup “a classic case of buyer’s remorse.”
‘Unlike in 2008 and 2009, there was a lot of pretend and extend. Here, there is no pretend. There’s just extend.’
Cynthia Romano, a global director at CohnReznick Advisory
The companies involved in those deals either didn’t respond for a request for comment, or declined to comment beyond what already was in the public realm, for this report.
Neil Hennessy, chief investment officer of mutual-fund operator Hennessy Funds /zigman2/quotes/205385110/realtime HFCSX +0.84% of Novato, Calif., said there is more to getting the numbers to line up right when merging, buying or selling companies. While he said Zoom videoconferences can offer an alternative to conducting business mostly by phone or email during the pandemic, he also thinks they are a poor substitute for sitting across the table with someone when negotiations heat up.
M&A has been a big part of the mutual-funds industry for several years, particularly as firms have looked to grow scale to compete with the “mega managers.” Hennessy doesn’t expect the coronavirus pandemic to slow that trend overall, but he does look forward to the return of in-person meetings to better hash out what partnerships might be possible.
“I like to get a sense of who I’m dealing with,” he told MarketWatch.