Here’s what’s next for M&A and dealmaking

One would reasonably assume that companies are putting the mergers and acquisition plans on hold as the COVID-19 pandemic is showing little sign of slowing down. But that isn’t the case at all, according to Morgan Stanley’s Vice Chairman and Global Head of M&A Robert Kindler

Deal activity hasn’t slowed down

Morgan Stanley bankers worked on three major and high-profiled deals in 2020, the most recent of which is Analog Devices, Inc.’s (NASDAQ: ADI)  $20 billion deal to buy Maxim Integrated Products, Inc. (NASDAQ: MXIM). The two other deals consist of Aon PLC (NYSE: AON) buying Willis Towers Watson PLC (NASDAQ: WLTW) for $30 billion and Thermo Fisher Scientific Inc. (NYSE: TMO) paying $12 billion for Qiagen.

As a whole, there is “definitely” more M&A activity in the market and bankers are eying mostly a 2021 timeline for deals to close, Kindler said on CNBC’s “Squawk Box.”

But the bottom half of 2020 could see a slow down in deal-making involving cash, simply because valuations are “pretty high” right now, he said. In fact, companies are now avoiding making deals in cash, case in point Chevron Corporation (NYSE: CVX) could have afforded to buy Noble Energy, Inc. (NASDAQ: NBL) with cash on hand but opted for a stock deal instead.

Successful deal-making requires regulatory bodies to sign off on an M&A play and there is a lot of scrutiny in deals now. Coupled with valuation concerns, it is unlikely there will be an elevated level of deals in the market any time soon.

What the industry will look like in six months

Major banks that reported earnings have shown “reasonable” M&A activity so the industry as a whole might not falter. But expectations for any large-scale and transformational deals happening are unrealistic so boutique M&A firms will likely face major challenges moving forward as working exclusively on small deals will get “pushed out.”

Larger and first-tier Wall Street firms will emerge from near-term headwinds as this is nothing new for the group, he said.

“There will be some disruption, but it’s near-term,” Kindler said.

Meanwhile, there is a growing trend among investors to push their companies to pursue M&A deals, partly with cash that would have otherwise been allocated for share buybacks. Companies may realize that M&A is a “bigger strategic imperative” than it has ever been.