June 1, 2020 UW Finance Association The Outlook of Mergers and Acquisitions for 2020 Market Research Research and Education The Outlook of Mergers and Acquisitions for 2020 All amounts in $US unless otherwise stated. Before the Pandemic Author(s): When 2019 came to a close, it marked the end of more than a Albert Liu Research Analyst decade-long bull run. The market was at all-time highs and Onat Karacan businesses were flourishing. Corporate transactions were Research Analyst prominent during this time as companies sought to grow their Editor(s): businesses to new heights. John Derraugh and Brent Huang Co-VPs of Research and Education Mergers and Acquisitions (M&A) deals were no exception. A recent poll done by the Deloitte US M&A Team, who surveyed a thousand executives at corporations and private equity firms, found that the majority agreed that transaction activity will remain robust for the year 2020. Exhibit 1: Infographic on professional perspective of M&A deal volume expectations going into 2020. (Deloitte) Deal volume expectations 63% Increase 79% 33% Stay the same 18% 4% Decrease 3% Fall 2019 Fall 2018 Before the pandemic, M&A activity had been declining for a few years, as the decade-long bull run began to increase and inflate valuations of corporations. While professional expectations were bullish on the volume of M&A transactions in 2020, the presence of larger deals was anticipated to decrease. According to Deloitte, the marketplace is seeing more interest in deals in the sweet spot between $100 million and June 1, 2020 1 UW Finance Association The Outlook of Mergers and Acquisitions for 2020 $500 million. Going into 2020, industry professionals had their expectations high towards the success of M&A deals for the year, despite some pessimism towards deal size. Exhibit 2: Annual Dollar Value of M&A deals from professional institutions in a typical year (Deloitte) What is the total annual dollar value (aggregated enterprise value) of all the deals your company completes in a typical year? 16% More than $0 to less than $100 million 14% $100 million to less than $500 million 38% 28% $500 million to less than $1 billion 27% 28% 15% $1 billion to less than $10 billion 23% $10 billion or more 4% 6% Fall 2019 Fall 2018 The Pandemic’s Arrival The arrival of the pandemic put a severe amount of stress on some businesses, with an obvious example being airline stocks such as Air Canada (TSX: AC.TO). Simultaneously, however, it has also benefited a variety of companies that are better positioned for the change in the social landscape. Examples include DocuSign (NASDAQ: DOCU), a remote signature provider, or Activision Blizzard Inc (NYSE: ATVI), a video game publisher experiencing an increased player base. Exhibit 3: Activision Blizzard Inc., (NYSE: ATVI) | May 3, 2020 to May 8, 2020 Activision Blizzard Inc. stock jump after first quarter earnings release. With this change in value comes significant implications to the M&A market. Essentially, the pandemic has significantly influenced the current valuations of businesses, adversely affecting M&A activity. All companies engaged in M&A transactions are now facing increased risk and uncertainties. June 1, 2020 2 UW Finance Association The Outlook of Mergers and Acquisitions for 2020 An important factor that will dictate what problems acquirers and sellers will face is the current stage that the M&A deal is going through. Newer deals may be pulled or re-negotiated as a result of changed valuations or delayed until the symptoms of the pandemic subside and earnings recover. An example of a hurdle that hinders transactions in their early stages is regulatory delays, as regulatory approvals are very significant to a transaction’s timeline. A specific example is the Federal Trade Commission and their ability to provide early terminations. As a response to the virus, they adopted a temporary e-filing program but amongst such transitions, the amount of early termination grants being approved has inevitably decreased. For deals that are in their later stages, sellers may be looking for ways to force buyers to close, and buyers may be looking for ways to potentially renegotiate without incurring liability. Harvard Business Review highlights an interesting hurdle for buyers using third-party financing for their M&A deals; third-party financiers may be able to pull their funding if the buyer is unable to meet certain financial measures such as their debt-to-EBITDA ratio. This poses a significant risk to both the acquirer, who cannot pull away from the deal, and the seller, as they face a buyer facing insufficient funding and/or bankruptcy concerns. Due to the complex and lengthy nature of an M&A deal, buyers and sellers will have a hard time reaching closure during the pandemic. Within this section, only a few hurdles and examples were mentioned, but there are many more problems buyers and sellers will face in this difficult time. M&A Deals Through the Pandemic Despite, the adverse effects on M&A transactions, there are still deals being negotiated and completed. On May 15, Verizon (NYSE:VZ) acquired BlueJeans for just under $500 million to further expand Verizon’s Advanced Communications portfolio. The New York-based telecom and media giant had its shares rise 1.9%, closing trading at $55.72 following the acquisition. BlueJeans, founded in 2009 and based in San Jose, California, is a company that provides an interoperable cloud-based video conferencing service connecting participants across multiple devices and platforms. Exhibit 4: Verizon Communications Inc, (NYSE:VZ) | May 11, 2020 to May 19, 2020 Stock jump following the closing of the Verizon-BlueJeans deal While it may be obvious that the video conferencing capabilities of BlueJeans is a hot item during this pandemic, both sides stated that this deal was much more than the short-term requirements of COVID- June 1, 2020 3 UW Finance Association The Outlook of Mergers and Acquisitions for 2020 19. More so, Verizon saw the conferencing platform as a great complement into their 5G strategy and will be deeply integrated into Verizon’s future. “As we have all learned during this pandemic, video conferencing is a powerful medium for connecting people so they can collaborate and work productively,” said Quentin Gallivan, CEO of BlueJeans Network. “Combining BlueJeans with Verizon’s innovations in 4G, 5G and Mobile Edge Computing opens up possibilities to serve customers in new and exciting ways”. Verizon topped earnings three out of the last four quarters. It has a trailing four-quarter positive earnings surprise of 1.2% on average with stock trading with a forward P/E of 11.5x. Verizon also has a dividend yield of 4.55% compared with 4.9% of the industry. The company has a long-term earnings growth expectation of 3.1% compared to the industry’s 8.8%. As of May 29th, 2020, at the close, Verizon Communications was priced at $57.38. June 1, 2020 4 .