Survey: Coronavirus shutdown leaves tech M&A bankers with little to bank on

With economies around the globe at a standstill and complex M&A negotiations curtailed by quarantine, tech investment bankers don't have much going on during the current coronavirus pandemic. And, according to a just-published survey of senior bankers by 451 Research, most don't see business picking back up anytime soon. Acquisition pipelines have been hollowed out so much that a bear market for banking looks inevitable, regardless of how the broader economy recovers from the unprecedented outbreak.

In our special Flash Survey: Technology Investment Banking Outlook, nearly two-thirds of respondents (63%) said they have less work in their pipeline right now than they did a year ago. By far, that's the most pessimistic outlook for the tech banking business we've ever received in our 15 years of surveying advisers at some of the busiest firms in the industry. (For more on this historic time in the M&A market, see our full report on Q1 activity.)

Underscoring just how much the pandemic has upended tech M&A, consider this: The current view from bankers about their business is pretty much the exact opposite of the view they typically give us. Since 2010, bankers have reported substantially fuller pipelines every single survey, with year-over-year growth in the value of deals they are working on ranging roughly from 50-80%. In contrast, a majority of bankers told us in our just-closed survey that they have far less in the works for the coming year than they did in the previous year.

Not surprisingly, the only other time in the 15-year history of our surveys when advisers have indicated thinner M&A pipelines was during last decade's Credit Crisis. Yet even the outlook during that historic market collapse is nowhere near as dire as the current outlook. In the 2009 survey, which collected views from bankers in the dark days of December 2008, exactly twice as many respondents said the value of mandates in their pipeline had shrunk than said they had increased.

Ominously, when it came to assessing workloads right now, bearish bankers outnumbered bulls four to one. (Note: 451 Research's long-standing Tech Banking Outlook is fielded in mid-December each year, with questions covering expectations for the coming year. For example, bankers offered their pre-coronavirus outlook for tech banking in 2020 in a mid-December survey. This special Flash Survey, which looked at the impact of COVID-19, was in market over the past week.)

Nor do bankers see their pipelines filling back up immediately. Consider the outlook for the most common investment banking service: sellside M&A. This is the day-in, day-out type of work that keeps the lights on at virtually all firms, ranging from the largest bulge-bracket shop to a one-person operation. Yet in our survey, three-quarters of bankers said they expected their pipeline for sellside work for the remainder of 2020 to remain below last year's level. (As for the degree of the decline, responses were equally split between 'substantially' lower and 'somewhat' lower.)

Given that the gestation period for acquisitions is typically about nine months, the lower-for-longer pipeline assessment suggests that slump in the tech M&A will last well beyond the end of this year. A quick look back in history shows that's what happened during the previous economic recession. Tech M&A spending bottomed out in 2009, with the value of deals that year plunging two-thirds from the pre-Credit Crisis year of 2007, according to 451 Research's M&A KnowledgeBase. Yet dealmaking barely picked up the following year, with our data showing acquisition spending in 2010 at the second-lowest level of the past 15 years.

Also coming through in the views of the bankers is how suddenly their pipelines dried up. Nine of 10 respondents said their business had taken a hit in just the past two months. It was only a matter of how many deals had been derailed.

In an attempt to quantify the impact of coronavirus, we asked how much business had been canceled or postponed since the outbreak hit the West in February. The answer: Investment banking isn't the travel industry, but it is facing a substantial disruption as broad uncertainty around public health (and the health of the economy) undermines the confidence required to transact.

In the survey, half of bankers (53%) estimated the number of active mandates they are working right now is down at least 25% compared with pre-coronavirus levels. But highlighting the depth of the current crash, among that bearish respondent group, one in four bankers (24%) said at least half the deals they were working on in February are no longer moving ahead, either temporarily or permanently.

Admittedly, and this certainly came through in the open-ended comments in our survey, our speculative questions about how the unprecedented pandemic will play out required bankers to make a fair number of best guesses. Accurately taking stock of business in the midst of an ever-increasing number of unknown – and largely unknowable – variables does not lend itself to precision.

That goes double for the M&A process, since a would-be buyer can't definitively decide about a multimillion-dollar acquisition the same way, for instance, a would-be sports organizer can choose to cancel a multimillion-dollar event outright (Wimbledon 2020) or push it out to a fixed future date (Tokyo Olympics 2021). Acquisitions are indeterminant events even in the most stable times and right now, things are historically unstable.

Just as coronavirus has reshaped the overall global economy, it is also forcing bankers to adjust how they do business. The growth-oriented playbook they used to profitably build their firms during the bull market of the past decade has been put away. Instead, bankers are shifting their offerings to reflect the current downturn.

Broadly speaking, during the pandemic and accompanying economic shutdown, bankers are now focusing their skills on helping clients get through rather than get ahead. We would note that same sentiment (enduring the painful disruptions from coronavirus) is also going to play out at the firms of the respondents themselves.

In our survey, we asked about plans for headcount changes for the rest of 2020. Basically, half of the bankers (48%) indicated they didn't expect any change in the number of employees at their firms. Of the remaining half, however, four times as many respondents forecast job cuts (42%) as forecast new hires (10%). The outlook for investment banking comes as overall employment levels are plummeting at historic rates. Forecasts vary, but some economists project the unemployment rate in the US because of the coronavirus shutdown could spike to the highest level since the Great Depression.

In terms of work for clients, the bankers' shift from expansion to protection came through clearly when we asked about which of nine investment banking services they expected to be busy with for the rest of the year. (Or viewed from the other side: What offering did they expect to be the most needed by the market?) By a landslide, respondents to 451 Research's Flash Survey: Technology Investment Banking Outlook picked 'restructuring/turnaround.'

Slightly more than half (51%) of the firms that offer restructuring work expect to be doing 'substantially more' of it in the months ahead. (In a sign of just how suddenly business has crashed, we would note that when we asked bankers the same question last December, not a single respondent envisioned doing 'substantially more' restructuring in 2020.)

Further, in our just-completed survey, another one-third (34%) indicated they would have 'somewhat more' restructuring work this year. Putting those responses together yields an inescapably pessimistic implication about the staggering amount of work needed to recover from coronavirus: Some 85% of bankers said they expect to be busy helping companies work through the severe operational and financial problems caused by the outbreak. That's time and energy that might have otherwise gone toward growth initiatives at companies such as M&A or raising capital.

In a similarly extreme – albeit inverse – impact on their business, nobody is talking about taking companies public at all this year. Excluding those firms that don't offer underwriting, fully nine of 10 bankers said they will be doing less IPO work. It's perhaps not surprising that when huge swaths of the economy are shut, the IPO window is likewise closed. But the disappearance of the IPO, which bankers anticipate will be the case for at least the rest of 2020, removes one potential exit for startups, just at a time when the other exit is expected to be harder to come by, too.

However, valuations won't plummet. (Unicorns aren't projected to be 'demi-corns' or anything.) The prevailing view, held by six of 10 bankers we surveyed, called for startups to end 2020 valued 10-25% below their level in early February, before the pandemic had really started. (For reference, that range encompassed the declines in US equity markets – both for the full year and from recent peaks – when bankers were filling in the survey in early April.) Another one in five bankers forecast a drop in private company M&A valuations of at least 25%.

A similarly protracted recovery is expected on Wall Street. When we asked bankers when they thought the S&P 500 Index would regain its pre-coronavirus level, only one in 10 said it would happen this year. Two-thirds of respondents projected the rebound will come in 2021, with a slight preference among respondents for the first half of the year rather than the back half. The remaining 22% of bankers predicted the S&P 500 will be underwater into 2022 or longer. Overall, that implies a much-speedier recovery for the equity market than during the Credit Crisis, when the stock market didn't regain its 2008 peak until 2013, according to S&P Global Market Intelligence's Capital IQ.

A note on 451 Research's Flash Survey: Technology Investment Banking Outlook: This special edition of our long-standing annual survey attracted 60 responses from senior investment bankers (Head/Co-Head, Managing Director, Principal). Nine of 10 responses came from US-based bankers, with half of those based in the San Francisco Bay Area, and another quarter coming from Boston and New York City. The Flash Survey on the coronavirus pandemic's impact on technology investment banking was open April 7-13, 2020.