One of the consequences of the coronavirus bear market is the death of mergers and acquisitions (M&A) and will impact on several ASX stocks that could be in your portfolio.
The market meltdown is likely to bring M&A activity to a halt if the GFC experience is anything to go by, according to the Australian Financial Review.
This is unlikely to reverse even as the market recovers from the COVID-19 pandemic as it took months if not years after the S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) bottomed in March 2009 before vendors and bidders came back to the negotiating table.
Capital raising to overtake M&A
But investment bankers are standing around twiddling their thumbs. They are said to be running around town looking for distressed companies needing a capital injection.
Online travel agent Webjet Limited (ASX: WEB) looks to be first off the rank. The stock went into a trading halt to prepare for what is likely to be a deeply discounted capital raise.
Why takeover activity is likely to drop
Coming back to acquisitions, one reason why the M&A scene is likely to resemble a wedding venue in a coronavirus lockdown is because buyers and sellers won’t agree on price.
Vendors still expect pre-crisis valuations while potential bidders demand a big discount to account for the new reality.
The price gap won’t close sufficiently to get the parties back to the negotiation table for some time yet – unless it’s a distress sale.
ASX stocks impacted by the M&A dearth
This has implications for ASX companies looking to sell underperforming businesses. As it stands, Downer EDI Limited (ASX: DOW) suspended its review of its mining business, which was speculated to be sold.
Others looking to divest problematic assets, like Lendlease Group (ASX: LLC), will probably also have to put its plans on ice.
Misfortune turns to fortune
Ironically, the fallout from the Banking Royal Commission helped the big four banks dodge a bullet. They were forced to simplify their businesses to repair the damage caused by their immoral, if not illegal, activities of the past.
Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) all sold businesses, including their life insurance divisions.
The only exception when it comes to life insurance was Westpac Banking Corp (ASX: WBC). Management might be kicking themselves now for being slow off the mark in making a final decision.
It might have been waiting for the right time to maximise what it could squeeze from the asset and was said to be trying to strike a long-term partnership with a buyer as opposed to doing an outright sale.
And if you were wondering, Westpac has one of the weakest balance sheets among the big four banks.
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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, Webjet Ltd., National Australia Bank Ltd., and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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