We usually associate mergers and acquisitions (M&A) with bull markets and high levels of corporate cash flows, but could the coronavirus crisis force companies to huddle together for survival instead?

With share prices in some sectors – particularly smaller-cap, domestically-facing business areas – still struggling to recover from the sell-off, could we be about to see a wave of opportunistic bids?

THANKS BUT NO THANKS

There have already been a couple of examples of companies tentatively approaching rivals for ‘preliminary talks’ on getting together.

This week car dealership Pendragon (PDG) revealed it had held ‘outline discussions’ with rival Lookers (LOOK), whose shares are down 56% year to date due to a fraud investigation, in order to explore a deal.

Sadly for Pendragon, which thought that ‘such an exploration would have proved beneficial’, Lookers wasn’t interested and Pendragon shares dropped 7%.

However there would seem to be some logic to M&A in the car dealership business, given the potential to cut costs through selling off duplicate sites, consolidating head office functions and
joint marketing.

THE RETURN OF THE POISON PILL

Meanwhile, in mid-April, fund manager Harwood Capital launched an unsolicited bid for Fulcrum Utility Services (FCRM:AIM), which was rebuffed. Fulcrum called the bid ‘opportunistic’ and urged shareholders not to accept.

In the US, several companies including energy company Chesapeake have deployed a ‘poison pill defence’ in order to deter would-be acquirers.

This involves issuing additional shares to existing shareholders at a discount if an acquirer triggers a certain limit, usually between 10% and 30%, thereby diluting them and making a takeover more expensive.

Given the collapse in the oil price and the 50% fall in the FTSE Oil Equipment & Services sector this year, we wouldn’t be surprised if this sector sees a spike in M&A both friendly and hostile.

OUT IN THE COLD

Industries which are sadly unlikely to see much M&A are clothing retail and pubs and restaurants. It’s no surprise that with high street shops shut for now there have been no buyers for once-illustrious brands such as Laura Ashley, Oasis or Warehouse.

For pubs and restaurants, however, the situation could be even more dire. With rules on social distancing likely to be in place for many more months, a huge number of firms – some in the industry put it as high as 80% – may no longer be viable meaning there is little sense in consolidation. Better to hunker down, preserve cash and hope that a vaccine comes along soon.

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