M&A activity plummets for 2020
The volume of mergers and acquisitions involving Texas businesses plunged in 2020 to the lowest level since 2013, even as deal activity bounced back strongly during the final three months of the year.
The number of transactions in which Texas companies or private equity firms were the buyers or sellers fell 19 percent last year as the overall business climate cooled due to the coronavirus pandemic and the beating taken by the state’s energy sector, according to data provided by Mergermarket, an independent research firm.
The 1,024 deals completed in 2020 had a combined value of $259 billion, a 14.6 percent drop from 2019 and the worst annual M&A deal value since 2011.
The year began with no hint of the upheaval to come. There were 315 deals announced in the first quarter, compared to 317 the previous quarter, according to Mergermarket.
But deal activity plummeted in the second quarter to just 155 transactions as a result of COVID-19 lockdowns, travel bans and work-from-home orders. In fact, Q2 had the fewest M&A deals since the third quarter of 2009 and the depths of the Great Recession.
The market began to recover in the third quarter, with 252 trans
actions, and in the fourth there were 300 as the business world adapted to remote working systems and as lockdowns were lifted.
While COVID-19 lockdowns early in the year ground dealmaking to a halt, the pandemic cannot be completely blamed for the decline in activity, as energy M&A activity was already on the downward slide from 2018 to 2019, according to Vinson & Elkins partner Matt Strock.
“It was around a 35 percent drop on the numbers we see just from 2018 to 2019, so there’s no doubt that kind of coming out of 2019, energy M&A limped at best into 2020,” said Strock, based in Houston.
But King & Spalding partner Jonathan Newton pointed out that lower deal activity in 2019 versus 2018 did not make a trend.
COVID blamed
“I think 2020 was poised to be a really good M&A year, putting aside COVID, because economically things were going really well, there was a lot of momentum,” Newton said. “And then, unfortunately, what would have been a really good M&A year was completely reversed by virtue of COVID.”
The pandemic had another interesting effect on deal activity last year: The fourth quarter, historically one of the quietest periods of the year in terms of M&A, saw the most activity, with 300 deals amounting to $118 billion announced. The weakest quarter was the period from April to June, with just 155 deals adding up to $12.5 billion.
“I think the fourth quarter was the busiest partly because the second quarter could not have been any worse,” Kirkland & Ellis partner Sean Wheeler said.
Energy, mining and utilities deals, totaling $57.2 billion in value last year, made up the largest share of the market with 25.2 percent. Technology, a growing sector in the state, was a close second at 22 percent.
“We’re definitely seeing real strong growth on the tech side,” Strock said. “I think if nothing else, COVID probably further accelerated that as people became increasingly comfortable with remote working.”
Newton also said he was not surprised by the strong showing from the technology sector.
“In some respects technology was immune to COVID, if not benefited from COVID,” he said. “I’m sitting in my kitchen right now, with my iPad, my computer, my two phones for work and my personal phone, and I’ll be here all day.”
Wheeler said he expected law firms’ emphasis on technology and renewable energy to grow, as those sectors become more significant relative to traditional hydrocarbons. He predicted tech deals will overtake energy deals in the next five years or so.
“There is a massive shift underway away from hydrocarbons toward renewables and toward technology,” he said. “So I would continue to expect energy deals to kind of suffer. Even if oil prices go back up, I don’t think that energy deals are going to exceed their 2019 (levels).”
Wheeler nevertheless had a bearish outlook, citing a lukewarm but limited interest in dealmaking on the part of buyers and sellers.
“I don’t feel a lot of momentum toward deals,” he said. “We were busy, but it’s not like there’s a lot of excitement about doing deals. I mean, people are still trying to understand what’s happening, where the market’s headed.”
Shift toward tech
Strock agreed that tech and renewable deals were on the rise, though he saw the shift coming sooner.
“We’ve seen that fourth quarter momentum carrying over into this year,” Strock said.
”Lots of people are looking at deploying capital, sponsors are actively looking at various opportunities on the tech side and on the energy side. The energy revolution, renewables, are all very hot areas right now, attracting a lot of capital and work.
“We’re very optimistic about 2021, going into it and really see a lot of momentum in a number of our key areas.”