The M&A market started 2020 with excellent expectations, also driven by the Brazilian government’s forecasts regarding GDP growth to be achieved at the end of the year, which was estimated at some point to be 2.2%.
However, there was one factor that neither the market, nor any market experts, had considered, which is the devastating effect that the pandemic, originated in the city of Wuhan, China, would have on the global economy, slowing down the entire economic movement on the planet.
The sectors most affected in Brazil by the crisis would be Manufacturing, Transport and automotive, Consumer and Financial Services. On the other hand, Telecommunications, Media and Entertainment, Life Sciences, Construction and Real Estate sectors may be less affected by the crisis, nationwide.
After a very good year for the M&A market in Brazil with an increase of more than 40% in transactions volume, most of the negotiations were suspended, in view of the impacts caused by the coronavirus. A factor that may have contributed to this is the fact that, with the measures of social isolation, one of the most important M&A steps is prevented, mainly in the middle market. This step is represented by the eye-to-eye meetings for negotiations, visits to facilities of the potential target that will receive investments, aiming to be acquainted with the operations, to better know your new business partner, among other aspects. The virtual world and the remote connection brought many advantages, but this component is still very important for an investment decision to some degree.
It is likely that, part of these uncertainties will last for many months, being impossible to predict what might happen and what would be the fall in M&A activity this year. On the other hand, there might be an alternative route in which companies that intended to raise capital via IPOs this year, may be interested in entering into a M&A process, accelerating capitalization. These companies were preparing to do the IPO in 2020 and they may not be able to resume the process until the middle of 2021 and certainly many of them cannot wait all this time and will have to look for alternatives.
Looking at the market for medium-sized companies, even if organizations benefit from the incentive measures recently announced by the Federal Government, this may not be enough for the survival and health of the business. This factor may also open a window of M&A opportunities, whether in the partial or total sale of a business. There will certainly be investors interested in allocating capital in sectors that are aligned with their strategy and, possibly, at attractive prices and conditions.
There will also be an interesting movement of distressed asset transactions (Distress M&A), which specialized funds have looking for opportunities for some time, as a way to also help businesses and boost the economy.
A few months after the beginning of the new coronavirus pandemic, the effects of the spread of the virus around the world have already hit the economy intensely. Business leaders are trying to understand how the economy will rise in the post-crisis and are already planning acquisitions for the next 12 months, a way to anticipate the needs that will come in the post-crisis from an investment opportunity in the market, at attractive prices.
On the other hand, if everything goes well, we expect the recovery of M&A activities possibly in the last quarter of this year, but companies must be prepared for this movement.
After a period of calm and caution, the phone rang again at financial boutiques and investment banks. They are managers and analysts of private equity funds, looking for asset portfolios for potential acquisitions.
Although there is not much optimism in the local market, where the GDP of 2020 is expected to be a retraction of about 3.3%, we see good opportunities and that, with the right price, right time, investors will be able to find good opportunities in Brazil , impression confirmed by the movement that we see by private equity fund managers.
Those who are prepared are resilient will thrive and benefit from the movement when the market resumes its activities after the pandemic effect.
Andre Bueno is a Transaction Partner at HLB Brasil.