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Might M&A, IPO Activity Offer a Window to Sentiment?

As COVID-19 hit and economies shuttered, long-planned IPOs and mergers slowed to a halt around the globe. German chemical firm Atotech, Russian oil giant Sibur, China’s 58 Home and the US’s Airbnb—to name a few—all delayed or halted IPO efforts in March and April. The same was true for M&A, where banks, financial firms and other parts of the market rethought agreed upon deals. M&A globally dropped nearly 50% through the first two quarters of 2020 compared to 2019, while IPO activity fell a more modest 6.8%.                             

None of this is surprising: M&A and IPO activity are likely a decent proxy for sentiment—with participants’ appetite waning as the macro backdrop’s favorability declines. On the flip side, then, it can potentially provide early insight into how quickly sentiment is rebounding. And we may now be seeing some sign of life in certain markets.

In Asia (ex-Japan), M&A activity in Q3 to date has already surpassed both Q1’s and Q2’s levels at a 3.6% premium to the same quarter as last year—and with another month and a half to go before the quarter ends. Year to date, M&A activity in the region has risen 10% overall—the only region to see growth in 2020.

Asia ex-Japan’s growth is primarily fueled by China—which could be an encouraging harbinger for other areas of the world, given China was the first to lock down. The activity is centered in the utilities and energy sectors—which were particularly hard-hit by reduced global activity. Utilities and energy mergers account for $121 billion (27.9%) of the region’s overall M&A activity. It’s worth noting the government’s played a role as well—that said, perhaps it also speaks some to stronger companies’ improved ability to capitalize on energy’s recent fire sale. Technology comes in a distant second, with $70 billion in M&A activity, or 16.4% of the region’s total.

The case is similar in venture capital and IPOs. VC funding in Asia ex-Japan increased 20% in Q2, while Europe increased 9% and the US, 3%. Four of the year’s seven largest IPOs in the region happened after July 1—a possible sign of strengthening in that market, too.

There are similarly some signs of life in Japan, too, where Marathon Speedway agreed to sell its gas stations to Seven & i. While we won’t weigh in on the deal’s wisdom or the potential positives or negatives for either company (or for others mentioned herein), that the two sides postponed the deal until they were able to reach an agreement on price—in what would seem a reasonable trade-off given heightened macro uncertainty—possibly points to management teams’ growing confidence in market conditions.

In the US, it’s worth digging a bit beneath the headline IPO numbers to get an accurate picture of activity, which can understandably be quite lumpy. While the number of IPOs dropped in 2019, the total valuation was in line with 2018’s, given unicorn IPOs in 2019 like Lyft and Uber, both of which listed in Q2. By the peak of pandemic turmoil in Q2 2020, the IPO market was in a “deep freeze.” Yet in Q3 to date, total IPO values have already surpassed total values in Q3 2019—notable recent IPOs have been Warner Music Group and Royalty Pharma.

M&A activity, on the other hand, hasn’t resumed in earnest in the US yet—though tech deals seem to be moving forward. Overall activity dropped roughly 80% YOY in Q2, and deals in Q3 thus far remain limited compared to the same time last year. Part of this could be regulatory-related—it wouldn’t be surprising if the approval process was slowed meaningfully as regulators transitioned to working from home, too. There may be nascent signs of reacceleration, though: Two of the three largest 2020 US deals were inked in July, led by semiconductor Analog Devices’ acquisition of circuit developer Maxim Integrated. Then, too, a potential Microsoft deal for TikTok could bolster those numbers, as could Siemens’ possible acquisition of Varian Medical Systems.

Though there are undoubtedly myriad factors that influence such deals, some early signs of improving M&A and IPO activity could point in a positive direction from at least a sentiment perspective.