The year of Mergers and Acquisitions: Navigating risk in a volatile market
In 2020, companies faced unprecedented risk as they tried to maintain business continuity while keeping their employees safe. But many experts didn’t anticipate one new pandemic-era risk trend: the rise of mergers and acquisitions (M&A).
Although mergers and acquisitions activity slowed down for the first half of 2020, it rapidly picked up steam in the second half of the year and is projected to grow even more in 2021. Follow along to learn more about how this flurry of M&A transactions is shifting the risk landscape—and what companies can do about it.
Mergers and Acquisitions: Slow down to speed up
After the pandemic hit in March 2020, companies anticipating another recession tightened their belts and focused on liquidity. As a result, M&A activity slowed down considerably—and experts predicted that the trend would last through the end of the year. But in the second half of 2020, historically low interest rates fed the mergers and acquisitions market. As Morgan Stanley reports, in the last quarter alone, there were 1,250 M&A deals globally, totaling over $1 trillion.
For the most part, these deals took place in industries that were the least impacted by Covid-19. Technology, healthcare, and financial services saw the most activity, whereas industrials and real estate fell well below historical transaction volumes. But many financial experts anticipate those harder hit sectors will rebound in 2021, now that there’s a clearer outlook on the market. With M&A volumes hitting their highest quarterly values in years despite the economic impact of the pandemic, it’s clear that these deals will continue to be a foundational part of business growth.:
Mergers and Acquisitions: SPACs take the lead
Mergers and Acquisitions: Contributing to this contentious economic landscape are special purpose acquisition companies or SPACs. Sometimes called “blank check companies,” these businesses are explicitly created to take other companies public, allowing businesses to avoid the traditional IPO process. SPACs don’t form with a specific merger in mind—instead, investors pool money and then have two years to find a privately held company to acquire.
According to David Perez, a chief underwriting officer of Global Risk Solutions at Liberty Mutual Insurance, the uncertainty of these transactions increases insurance risk.
“From an insurance perspective, you’re underwriting the company raising the capital, but you don’t always know what company they’ll acquire. That leaves a wide range of potential risks to contend with,” he says.
Because this area of the market is entirely speculative, it can lead to huge swings in stock values. Perez notes that some companies see “swings of 1,000 points from month to month.” That kind of volatility was formerly unheard of—and it is a major contributing factor to the hardening D&O insurance market.
