Winners in times of crisis
We asked M&A-advisors and investors about the European M&A environment in the first half of 2020 and their expectations for the near future.
As expected, the Covid-19 pandemic heavily impacted M&A activity across Europe. Respondents almost unanimously reported a sharp decline in the total number of transactions in the first half of 2020. Numerous sell-side and buy-side projects were put on hold or terminated, though there are significant differences between sectors. In industries like Automotive and Manufacturing, deal multiples declined for the first time in years. During H1 of 2020 the average transaction multiples in the (lower) mid-market dropped with c. 3% and now vary from 4.70 in the Netherlands to 5.85 in the DACH-region (Germany, Austria and Switzerland), with the UK and France both scoring a 5.45 average. A few sectors positively stood out (and make up for those heavily in decline). In all countries positive developments could be observed in Healthcare, Pharmaceuticals, E-commerce, IT services & software development. Nearly half of the advisors and investors (47,5%) that took part in the survey expects the deal environment to recover in the second half of 2020, 36% thinks the market will remain stable. Only a minority of 16,5% fears a further worsening of market conditions.
Trends are accelerated
According to Floyd Plettenberg, CEO of Dealsuite, longer-term trends in M&A are being confirmed and accelerated by the current crisis. This becomes especially clear when looking at the differences in valuation multiples. Plettenberg: ‘Sectors such as IT services & software development, Healthcare & Pharmaceuticals and E-commerce are the winners of the corona crisis. These sectors, that were already performing well, benefit from restrictive measures imposed by governments to combat the virus and from the growing demand for care and medication. We see this trend in Germany, France, UK and other markets where our international platform Dealsuite is active.
The German manufacturing industry was hit hard by the pandemic. This is reflected in the number of SME transactions in the whole of the DACH-region and deal multiples. Respondents note a decline in the number of transactions in Manufacturing & Industry of 15% as compared to H2-2019. Transactions in Construction & Engineering (-5%), Automotive & Logistics (-3%) and Retail (-1%) also declined, while Healthcare & Pharmaceutics was the only sector showing an increase in the number of transactions (+6% to +8%). Around one-third of all transactions had a deal price of over €10 million.
The average EBITDA multiple for DACH SMEs in H1-2020 was 5.85. Valuation multiples in the Automotive Industry and Transport & Logistics declined for the first time in years, while businesses in the sectors IT services & software development, E-commerce and Healthcare & Pharmaceuticals were sold at higher multiples than previously observed.
The majority of M&A advisors in the DACH-region did not experience any notable changes in the number of mandates, whereas one in three noted a decline by 25% or more. In April, 41% of the sell-side M&A projects were put on hold. Of these, 11% were resumed in July and 36% were terminated. By July, 36% of sell-side advisors had at least one project that was terminated.
Dealsuite-members in the DACH region are optimistic about market recovery. Nearly half (47%) expect that the M&A environment will improve in H2 2019, 34% expect the market to remain stable.
Three sectors accounted for nearly half of all transactions in H1 2020: Professional services (21%), IT services & software development (12%) and Construction & Engineering (12%). Relatively, Professional services made up one-fifth of all transactions completed in H1-2020. Most UK transactions (57%) of the respondents had a deal price below £2.5 million. About one in five surpassed £10 million.
The average EBITDA multiple in the UK mid-market in H1-2020 was 5.45. Multiples varied greatly between sectors, as is evidenced by the differences between Wholesale trade (3.75), IT services & software development (8.3) and Healthcare & Pharmaceutics (8.05).
In our survey from April 2020 (“Impact of the corona outbreak on the UK Mergers & Acquisitions mid-market”), 64% of the M&A advisors expected a decrease of at least 25% in their projects. This turned out to be overly pessimistic as by July, the percentage of advisors that experienced a decrease of assignments of 25% or more amounted to 34%. Conversely, 23% even stated they had witnessed a high growth (>25%) in the number of assignments compared to the previous half-year.
Out of all respondents, those in the UK are the most optimistic. No less than 55% expect improving market conditions in the second half of this year, while only 6% think the market will deteriorate.
More than a third of the transactions carried out in H1-2020 were either in the Manufacturing & Production sector (21%) or in the Business services sector. Nearly one in four transactions (21%) were done in the range of €5 to €30 million, whereas more deals were reported below €5 million (40%) and above €30 million (39%).
The average EBITDA multiple in the mid-market in France in H1-2020 was 5.45. Sector results ranged from 3.85 (Construction & Installation technology) to 7.3 (IT services & software development) and 7.4 (Health services & Pharmaceuticals).
More than half of the survey participants indicated that at least one of their deals had been cancelled in H1 2020. But while roughly half of the participants saw a decrease in the number of assignments, 27% did not perceive a change and the remaining 25% noted an increase in assignments.
Compared to advisors and investors in countries like Germany and UK, the French are slightly more cautious when making predictions about H2 2020. Still, 39% of the respondents believe M&A conditions will improve.
H1 2020 saw a sharp decline in deal volume, both on the sell-side (-41%) and buy-side (-29%). In line with other European markets, the share of the Professional services sector increased by 4% to 24%, while transactions in Industry & manufacturing decreased by 4%. The average deal size in H1 2020 was smaller than in the previous six months, with less deals above €10 million (from 17% to 10%) and more deals below €2.5 million (from 48% to 64%).
The average EBITDA multiple in the Dutch mid-market in H1-2020 was 4.70. Multiples grew (marginally) in only a few sectors: IT-services & software development (+0.05), Healthcare & Pharmaceuticals (+0.10) and E-commerce (+0.20). Hospitality, Tourism & Recreation took the biggest hit (-0.40).
A third of the respondents did not report a change in the inflow of new mandates, and one in five even welcomed more assignments than in the previous six months. More than half (54%) of all sell-side projects pre-corona have been continued to date, while of the 27% that were initially put on hold, about a third (31%) have already been resumed.
Almost half of the advisors (49%) expect the market to improve in H2-2020.