The Rebound in Deal-making and Global M&A Activity
In the early months of 2020, the outbreak of COVID-19 pandemic has dramatically affected the global economy, forcing companies to quickly adapt for a new business landscape. The impact on M&A volume diverged substantially across industries and economic areas. Global M&A activity was strongest in sectors least impacted by COVID-19 (e.g., tech, healthcare, and financial services), while it suffered a severe setback in industries more affected by the pandemic and characterized by medium/long-term recovery paths (e.g., energy/utilities, real estate).
Quite surprisingly, despite the brutal halt in the first months of 2020 (with monthly activity much lower than that registered in prior years), the global M&A market did not just recover but went into overdrive by the end of the year, reporting an average monthly count far beyond the historical norm in the second half of 2020 (e.g., about 13% higher than 2019. Source: Morgan Stanley). Furthermore, market insights reveal that M&A opportunities in the coming years will abound for companies who kept a strong position through the pandemic and that are in the right place to take advantage of them, whether these open up new markets or allow for bargain acquisitions.
QuotingRob Kindler, Global Head of M&A at Morgan Stanley: “All the elements are there for an active M&A market in 2021, from corporations looking for scale and growth to private equity firms and SPACs looking to invest capital”. Specifically, several are the factors underpinning a robust M&A activity in 2021, such as the expected rebound in sectors that were more severely affected by COVID-19, abundant capital from private equity and special purpose acquisition companies (SPACs), and the increasing emphasis toward digital transformation.
At the same time, companies must be ready to capitalize on these elements and take advantage of M&A deals. Recent reports by Deloitte and KPMG highlight some fundamental concepts that will be essential for companies to strengthen their positions for survival and success in the “new normal”, as well as to successfully handle future transactions and sustain corporate growth.
Resilience appears to be the new paradigm in setting up a successful post-covid M&A strategy. The pandemic has highlighted the importance of building and maintaining resilience in every aspect of the business, not only from a financial perspective, but also from the perspective of human resources, operations, and IT integration. From a deal perspective, building resilience entails a greater strategic emphasis on a company’s business portfolio and deal evaluation practices such as M&A planning and due diligence. Having a good understanding of the commercial aspects of a business target and ensuring that it is aligned with the refocused business strategy is of paramount importance to be resilient in today’s uncertain and fast-changing environment. In turn, this calls for a more integrated and strategic assessment as part of any pre-deal discussion, with a focus on identifying risks and opportunities associated with the new business landscape. Despite increased uncertainties and changing business models, COVID-19 has accelerated some broader shifts in the deal market and the economy in general, which should also be taken into account when planning for M&A. These involve, for instance, new working paradigms and organizational changes, which mandate companies to think through how the future of work will impact their business and transactions’ synergies.
Digital transformation and sustainability will be key drivers of investment and deal activity. A key component of a business’ arsenal in becoming and staying resilient is the investment in innovation. In the near future, governments are going to invest greatly in new technology and infrastructure to create an economic stimulus, while pursuing a strategic shift towards sustainability. A notable example is Europe’s investment in the electric vehicle infrastructure and green deal, or the Recovery Plan itself, which will be centered around the achievement of digitalization and sustainability targets. In this respect, M&A has an important role to play as companies typically pursue innovation either internally through R&D activities or by acquiring innovative targets. Hence, a growth of M&A deals involving high-tech companies is expected. Furthermore, businesses that do not want to be left behind need to think about how they can innovate their products and operations, looking at M&A as a promising means to accelerate growth, gain scale and become more digitally capable.
Sebastian Birolini (Università degli Studi di Bergamo)