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The future of M&A in Europe

Insights from the market players.

Is it the right time to go ahead with the planned transaction? Many business leaders have been asking themselves this very question. Depending on the assets or company being targeted, the current environment may pose varying degrees of risk, but this should not necessarily deter them.

The CMS “European M&A Outlook 2020”, published in partnership with Mergermarket, presents findings from the survey of senior executives from 230 European corporate and PE firms about their expectations for the M&A market for the rest 2020 and 2021. Key findings include:

M&A appetite weakens. Compared to H1 2019, M&A activity in Europe fell by almost one-third in terms of both volume and value in the first half of 2020. 64% of survey respondents do not expect the M&A market to return to pre-pandemic levels before at least 2023.

Financing conditions to tighten. Any source of financing is likely to be more expensive and subject to tighter covenants and terms. Banks and institutional lenders are focused on nursing current portfolios through the disruption of COVID-19 rather than funding new transactions. Therefore, survey respondents see private equity funds, non-bank lenders and credit funds as the key providers of capital. Close to 60% say private equity will be among the top two sources of deal funding, with 46% looking to private debt funds.

Distressed M&A, restructuring and corporate defaults to rise. Debt or liquidity issues are expected to be primary drivers of restructurings. Respondents predict that the most activity will come via deals related to distressed M&A, restructurings, carve-outs and corporate defaults. Almost three-quarters of cash-rich private equity firms noted their interest in distressed M&A.

Deal Dynamics: Pricing expectations between vendors and buyers widened. Sellers have been reluctant to sell assets at lower prices in a falling market. Equally, buyers are reluctant to pay full valuations at a time of high volatility. Buyers and sellers have only made transactions when there are clear strategic rationales or vendors have to sell to raise capital.

Divestment drivers. Divestment is emerging as a key post-coronavirus theme. Among those considering divestments, 83% say they want to counter the effect of COVID-19, 55% are looking to raise capital for increased financial flexibility, and 28% cite regulatory pressure.

Going digital: Companies that are not up to speed digitally will be eager to find M&A targets and invest in broadband connectivity, telecom companies and essential digital infrastructure. 83% of respondents identify the acquisition of new technologies as one of their two principal deal drivers.

For further insights and analyses on European dealmaking, please download our report here.

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