One of the major sources of economic growth and expansion in an economy comes from an unexpected source – the Mergers and Acquisitions sector (M&A). Investors interested in a specific market study the M&A activity over the years as it is telling much about the intensity and strength of economic growth.
For example, a strong M&A sector means that on average, the number of mergers and acquisitions increases year by year as corporations seek to expand their businesses. This is exactly what a healthy private sector looks like – businesses expanding their activity in domestic and foreign markets by means of acquiring other businesses or merging with them. In other words, finding synergies and making the most to innovate and grow.
The COVID-19 pandemic put a hard stop to the M&A sector. Businesses, just like households, had to think twice what the next best use of their cash is – expansion or building a buffer until the crisis is behind?
What the Pandemic Did to the M&A Sector
To start with, companies were forced to close manufacturing plants, construction sites and even delay investment projects. To some extent, the local lows forced them to do so.
In the case of an M&A, there is no local law to force a company to buy another one or to merge with one. Instead, it is the company that considers twice the opportunity cost of doing so or not doing so. Delays to some existing M&A announcements generate impressive costs – Amazon buying Deliveroo in the United Kingdom, Boeing buying Embraer in Brazil, LVMH buying Tiffany in the United States, etc.
These are examples of famous M&As for the simple reason that the companies are closely watched by investors and, as such, covered in the financial media. However, plenty of other examples exist of M&As that fly “under the radar” and were postponed due to the pandemic. For example, in April this year, Alpha Tech Holdings in the United States withdrew its tender offer to buy a French company, EOS Imaging – the price tag: $100 million. Or, Pacific Village Group, a European company from the Netherlands withdrew from the agreement to acquire Metlifecare, a New Zealand company – the price tag: $1 billion.
Such examples are everywhere. A failing M&A has adjacent, supplementary costs on the horizontal. Lawyers do not earn their fees, local taxes end up not being paid, management postpones expansion, etc. All these are costs generated by the pandemic.
Strong M&A activity signals a healthy economy and, why not, a bounce from the recession. Therefore, potential increase in the M&A activity may act as a leading indicator of economic growth to follow.