And the Top Alternative to Traditional M&A Deals Is... SPACs, of Course.

The Covid-19 pandemic is pushing private equity firms and companies alike to consider everything from club deals to minority stakes and joint ventures.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

When it comes to post-pandemic deal-making, blank-check companies and other alternatives are winning out over traditional mergers and acquisitions, according to a survey from consulting firm Deloitte published on Tuesday.

A record number of special purpose acquisition companies (SPACs), which raise money in an initial public offering to be used for any type of acquisition, have gone public this year, with business titans including Bill Ackman and Reid Hoffman, co-founder of LinkedIn, creating huge pools of capital to be invested. Forty-five percent of U.S. corporate executives said they are most interested in pursuing SPACs, alliances, and joint ventures, while only 35 percent cited traditional acquisitions or merging with another company, according to Deloitte, which polled 1,000 executives at companies and private equity firms.

Fifty-three percent of private equity investors are still primarily eyeing traditional acquisitions, while 32 percent also seriously pursuing other options such a private investments in public deals, taking minority stakes in companies, doing so-called club deals (when private equity firms team up to do a single deal), and striking alliances

Deloitte had seen the trend toward alternatives in M&A before the Covid-19 pandemic struck in March, but the economic impact of the virus has forced companies to consider every option given the low-growth environment, said Mark Purowitz, principal, Deloitte’s mergers and acquisitions consulting practice, and leader of the firm’s Future of M&A initiative, in an interview.

“The idea here is that we needed a broader definition of M&A, beyond just sell side and buy side,” said Purowitz. “Dealmakers needed to create more options.”


Purowitz added that the pace of dealmaking has not slowed down, despite the fact that the vast majority of professionals are still working from home. But more than half of respondents said cybersecurity is the biggest issue with virtual deal-making, he said. Deloitte found that it’s too early to say what the effect of working from home and the lack of face-to-face communication will mean for companies ultimately attempting to integrate two organizations once deals are finalized.

Corporate chiefs believe Covid-19 is having a long-term impact, not just a temporary one. Deloitte found that one-third, or thirty-three percent of dealmakers are thinking about transactions to transform their businesses as a result of the virus.

Sixty-one percent of respondents to the survey believe that M&A transactions in the U.S. will return to pre-COVID-19 levels in the next 12 months.

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Obstacles to globalization, including tariff battles and supply chain issues arising in the last six months, are damping interest in cross-border deals. Seventeen percent of corporate executives said they have no plans to do an international deal in 2020. That’s an 8-percentage-point increase from 2019, according to the survey. In addition, 57 percent said fewer than half of their deals involve companies whose primary operations are in foreign markets.

Cross-border deals may be declining, but companies are still grappling with international issues. For some companies, “supply chains have come to a halt virtually overnight. That’s forced companies to rethink their ecosystems and supply chains, and diversify themselves to get optionality. ‘Do I need to own them? And if yes, what investments need to be made? And if I don’t need to own them, what alliances and partnerships do I need?’” said Purowitz.

Deloitte found that M&A, whether traditional or alternative, is being driven by a variety of factors. Forty-three percent described their activities as defensive, while the remainder considered their M&A activities to be offensive. On the defensive side, 23 percent were pursuing deals to maintain their competitive position, and 20 percent were hoping a deal would prevent further damage to their businesses.

Since March, 60 percent of the participants in the survey said their desire for deals has increased. Private equity respondents had an even greater appetite for transactions since the start of the pandemic, with 70 percent saying they’re “more focused on new deals.”