By Cara Lombardo
Corporate deal making, prone to unexpected twists and turns in the best of times, has been upended by the coronavirus pandemic.
Many companies from Xerox Holdings Corp. to Axalta Coating Systems Ltd. have been re-evaluating takeover deals as employers shift their focus to ensuring they have enough cash to stay afloat and pay workers. Those plotting initial public offerings, such as Airbnb Inc., may postpone them.
Overall merger volume, which was already having a sluggish start this year, has come to a virtual standstill in the past two weeks.
The value of announced mergers in the first quarter through Monday is down 33% from a year ago to $572 billion, a seven-year low. In the U.S., the decline is even more acute at more than 50%.
IPOs so far look OK compared with the slow start in 2019, when a partial government shutdown precluded companies from moving forward with listings, but bankers now expect this year will fall far short of last year's relatively strong total. For companies to launch successful IPOs, they generally need stable -- ideally rising -- markets.
"Almost every variable is changing, whether it be CEO and board confidence, the availability of plentiful financing or stock prices," said Steven Baronoff, Bank of America Corp.'s chairman of global mergers and acquisitions. Aside from those with urgent needs, most companies have put deal making on hold, he said.
Even if there was a will to pursue mergers and other deals, the new coronavirus has thrown up a number of new barriers. Debt financing has dried up as banks turn off the spigot to meet more pressing client needs. Wild day-to-day swings in stocks make agreeing on a price that much harder, and the intensive face-to-face contact normally required to seal a transaction is now forbidden.
If there isn't a quick and substantial turnaround, 2020 could mark the end of a historic deal surge that was made possible by the long-running bull market for stocks and credit. Three of the past five years were among the top five on record for M&A activity globally.
That could jeopardize one of Wall Street's biggest moneymakers. For example, Goldman Sachs Group Inc.'s investment-banking unit, which advises companies on M&A and IPOs, among other things, accounted for just under 20% of the firm's revenue last year.
The financial and economic swoon has created opportunity for deal makers in other corners of the market. Bankruptcy and restructuring advisers have been inundated in the past two weeks by calls from potential clients, particularly in such areas as energy and retail.
Peter Weinberg, founding partner of boutique investment bank Perella Weinberg Partners, said conversations with clients have intensified and in some cases pivoted to topics such as credit and restructuring.
"The breadth of issues has increased," he said.
Private-equity firms, hedge funds and other investors, including Warren Buffett, who are flush with cash are circling the hardest-hit companies in the travel, lodging and entertainment sectors, eager to offer financial lifelines should they be needed, people familiar with the matter say.
"Cash is at a premium right now," said Jim Woolery, head of M&A and corporate governance at law firm King & Spalding LLP.
Traditional consolidation, however, won't ramp up until companies are again able to forecast their earnings with any degree of certainty, Mr. Woolery predicts.
Another potential source of deal activity meanwhile, advisers say, is hostile M&A, with companies emerging from the crisis in relatively strong positions moving on those that struggle to recover.
But right now, companies for the most part are slamming on the brakes. Several merger deals that had the potential to be among the largest of the year were quickly put on pause as the new coronavirus began to spread.
Xerox said March 13 it was postponing meetings with shareholders to push its $35 billion hostile pursuit of printer maker HP Inc. to give priority to the well-being of its employees and customers. HP, which has called Xerox's offer inadequate, said March 25 that such a debt-heavy combination in the current economic environment "could be disastrous."
Marathon Petroleum Corp. was close to selling its sprawling Speedway gas-station unit for more than $20 billion before a dip in oil and stock prices gave its Japanese suitor cold feet. Marathon, which named a new chief executive officer in March, is likely to revisit spinning off or selling the unit after things stabilize, according to people familiar with the matter.
Axalta, a paint maker, had been negotiating a roughly $7.5 billion sale to PPG Industries Inc. and buyout firm Clayton Dubilier & Rice, people familiar with the matter said. Those talks have stalled, the people said, after Axalta's stock cratered and, like many others, the company pulled its financial guidance.
Airbnb, meanwhile, was set to be the banner IPO of the year before a decline in travel and mounting losses threw its plans into doubt. And J.Crew Group Inc. shelved the planned spinoff of its Madewell brand to focus on debt payments, according to people familiar with the matter.
There are a few companies forging ahead. EBay Inc. for now at least is pushing with a sale of its classified-ads unit as activist investors look on. And Coty Inc., the struggling beauty company that previously announced plans to sell its professional-hair-care and Brazilian units, said March 20 the process would continue. It has been holding virtual meetings with potential buyers, people familiar with the matter said.
Write to Cara Lombardo at firstname.lastname@example.org