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.
Foolish takeaway
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.
