By Dike Onwuamaeze
A British International Law Firm, the HoganLovells (HL), which offers advisory on private equity transactions with specialty for African investors, has predicted that the third and fourth quarters of 2020 would be marked by aggressive mergers and acquisitions of distressed entities and businesses whose profitability and share values have declined due to the negative impact of the COVID-19 on the stock markets around the globe.
The push for merger and acquisition, according to HL, might not spare the Nigerian Stock Exchange (NSE) where stock prices of many businesses have depressed.
The firm also stated that the depreciation in the value of the naira would expose the Nigerian equity market to easy targets for foreign investors.
Furthermore, HL also predicted that Chinese buyers would shift their attention to infrastructure assets in Eastern Europe and other emerging markets in Asia, the Middle East, Latin America and Africa because of the strict regulation that made entrance into the United States of America and Western Europe very difficult.
The HL, in a statement prepared by its New York and London Partners, Mr. Christopher R. Donoho III and David A. Gibbons, respectively, stated the spread of COVID-19 has jolted financial markets, pushed valuations lower and was creating more opportunities for strategic investors and financial buyers on the hint for distressed assets and those willing to stomach some uncertainty.
Donoho and Gibbons added in the statement: “Private equity firms are sitting on about $1.45 trillion in dry powder or uncommitted investor capital waiting to be deployed.
“Some large hedge funds, having learned the lessons of the financial crisis and moved away from the quarterly redemption model, also have money that investors cannot take back on short notice.
“With the economy having just come through 10 prosperous years, which has now seemingly come to an end, there are many entities well-positioned as buyers for whatever comes next.”
The firm also identified hotel and rental car companies, airlines, aviation, manufacturing and restaurants, among others as sectors that would be a fertile ground for mergers and acquisitions. These are companies, according to the firm, that would have to revisit their strategies and form new plans.
“Late last year, market commentators and investment professionals were increasingly talking up the possibility of an economic downturn, but very few believed that one was imminent.
“Today, we are looking at a fundamentally different picture. The spread of COVID-19 is unfolding as a global human catastrophe unlike anything seen in our lifetimes, and necessary actions to curb the pandemic are causing a dramatic economic slowdown. “With stocks plunging into a bear market and with governments scrambling to craft appropriate measures to support the economy, comparisons with the last crash a dozen years ago are inevitable.
“This time there is a lot of capital on the sidelines, waiting to jump in. As economic disruption across industries and geographies creates opportunities, the investment landscape is setting up for what could be a significant uptick in merger and acquisition activity in the distressed space,” it added.
Donoho and Gibbons also pointed out that merger and acquisition activity over the remainder of 2020 would be a story of the haves and the have-nots.
“In the first category, there are strategic buyers who have accumulated cash through a record economic expansion that saw extraordinarily favorable business conditions for many companies.
“In this category is the well-known technology businesses reported to have ended 2019 with almost a quarter of a trillion dollars in cash on hand.
“The have-nots, on the other hand, include companies that work with low margins or have perhaps over extended themselves, and these companies are very dependent on their ability to borrow.
“There are startups in this group and companies that are still in their first years as public companies,” they argued.
They noted that the small and medium scale enterprises are concerned about low commodity prices, which would make it hard to service their debt.
However, the anticipated merger and acquisitions might not happen right away due to considerations that may slow deal making in the short-term, which include how long it would take to completely contain the pandemic.
“Everything is highly uncertain as long as the spread of the COVID-19 persists and confirmed cases continue to rise. Any sign that the outbreak is beginning to wane will be encouraging, but investors will need to be certain that the pandemic is being brought under control.
“Only then will it become possible to begin to assess the true depth of the global economic impact and the outlook for individual companies and sectors,” Donoho and Gibbons said.