Hattie Marsden
Apr 15, 2020

How COVID-19 is affecting industry M&A

Director of global M&A firm SI Partners reveals how the pandemic has shifted investment strategies in APAC, and who might come out on top.

How COVID-19 is affecting industry M&A

M&A across the technology and creative sectors began as predicted in 2020—with an increased focus on customer data, analytics, IT services, performance marketing, and technology-enabled services and agencies. Of the 300 senior decision makers across creative, media and technology that we surveyed in the second half of 2019, 61% said they wanted to acquire in Southeast Asia, with 30% of these saying they were aiming to make between 3-5 acquisitions in the following 18-24 months.

But COVID-19 has caused many businesses across the globe to stop, take stock and adapt. Many global businesses were still actively engaging with China, SEA and Australian targets in January and February as COVID-19 initially hit China, Hong Kong and Singapore. This changed as numbers started increasing in Europe and the US, and the commercial impact of the pandemic meant that more businesses began to prioritise immediate business continuity planning in March over more strategic activity such as M&A.

However, as we move into April, it is clear that the effects of COVID-19 are beginning to play out differently by industry sub-sector, client focus, service offer, geography and stage of the deal-making process.

Industry sector

Whilst we have seen a short-term reduction in activity around creative, communications and activation, businesses offering technology-enabled digital transformation services, commerce and high-end advisory are more resilient and relevant than ever. We have clients in these spaces receiving unsolicited approaches, demonstrating how some skillsets are visibly more valuable in a virtual world.

In terms of activity levels across different acquirer types, we’ve seen that whilst a number of strategic buyers have introduced certain procedures to slow or manage cost associated with M&A, the majority are still actively scanning and engaging with potential targets. This is particularly the case in SEA, where for some senior management teams, their reduction in travel means they have more time to assess targets.

We are also seeing a number of private equity and private equity-backed groups getting ready for a potentially busy second half of the year. There are M&A leaders stating that they are planning to use their strong cash position at this point in time to execute on their various build strategies, as they are expecting less competition from the strategic buyers. The current economic situation is increasing the divide between future-proofed, contemporary, financially robust agency businesses and those that have been striving to adapt. Those that are demonstrating strength and stability in a time of crisis are standing out to potential acquirers as a less risky investment opportunity.

Geography

Confidence underpins a large amount of M&A, and as confidence around economic recovery in China is improving, we are seeing deals that were in process moving forwards again. McKinsey’s global survey of consumer sentiment during the coronavirus crisis shows how consumer optimism is highest at the start and end of the contagion life cycle stage, and this has been broadly reflected in our activity.

Certain elements of the deal process in China have been impacted by travel restrictions, but as these are lifted processes can continue or complete. Assuming the contagion curve cycle in Europe and the US follows that of China, we are hopeful that they will follow the same path.

How might this play out in the rest of the year?

M&A by its nature is for the most part strategic. Whilst we expect a short-term reduction in deals closing in SEA, China and Australia over the forthcoming weeks, beyond that we anticipate that deals will be closing again for higher-performing assets with the most contemporary offerings.

In the last recession, some of the best performing corporates divested more during the downturn and acquired more in the recovery—the question is who will be the high performers this time around.

Hattie Marsden is a Singapore-based director at global M&A advisor and consultancy SI Partners

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