EY expects more mergers in second half in wake of Covid-19 crisis
‘Covid-19 has created new vulnerabilities and unforeseen challenges’
Consulting firm EY expects a significant increase in mergers & acquisitions (M&A) in the second half of the year, following the Covid-19 pandemic which has disrupted many sectors and brought business operations to a halt.
According to EY Confidence Barometer report released on Monday, business leaders across the world are looking beyond the immediate impact of Covid-19 measures on supply chains, revenue and profitability as they expect a significant increase in (M&A activity in the second half of 2020.
Almost three-quarters (73%) of more than 2,900 global C-Suite respondents to the survey expect 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,” Quintin Hobbs, Transaction Advisory Services Partner at EY SA.
Many believe that the effects of Covid-19 lockdown might be severe on SA's economy that is already under immense pressure, and with the recent downgrades to junk status by Moody’s Investors Service and Fitch, the road to recovery might be a tough one.
“Looking at SA, many corporates and whole sectors of the economy such as tourism, transport and banking are likely to face significant financial distress caused by the Covid-19 impact on the business,” said Hobbs.
EY has noted a dramatic slowdown in local M&A activity with almost all corporates, as well as private equity (PE) funds, pausing transactions until there is some clarity.
South African corporates are now focused on a range of short-term actions to protect their balance sheet and capital, including accessing additional funding, stopping expansion and cost reductions, Hobbs said.
“We 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 said.
According to EY the majority of companies assuming a recovery in the medium-term and the intention to actively pursue M&A in the next 12 months, remains at the elevated levels.
“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,” said Hobbs.
He added that 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.”