Cautious confidence: M&A in 2021

May 2021  |  FEATURE  |  MERGERS & ACQUISITIONS

Financier Worldwide Magazine

May 2021 Issue

2020 was a year like no other for merger and acquisition (M&A) activity. Though activity began relatively slowly, there was significant potential for transaction volumes to increase before the coronavirus (COVID-19) pandemic took hold at the end of the first quarter, at which point things hit a near standstill. As the gravity of the situation became clear, companies shifted their focus to more pressing matters, such as shoring up balance sheets, maximising liquidity and helping employees transition to remote working.

As the year progressed and some jurisdictions began to tentatively ease travel restrictions and social distancing measures, M&A activity began to pick up momentum. A late flurry of transactions in the second half of the year drove global M&A to $3.6 trillion in 2020, a fall of only 5 percent from 2019, according to Refinitiv.

In total, companies struck more than $2.3 trillion worth of deals from the start of July 2020, an increase of 88 percent compared to the first half of the year. Activity in each of the third and fourth quarters surpassed $1 trillion, marking only the second time since 2008 that dealmaking exceeded that level in consecutive quarters.

Some of that momentum carried over into 2021. The cost of capital remains at historically low levels and the rollout of COVID-19 vaccinations offers a ray of light at the end of the tunnel. Despite the unique and challenging circumstances of the last 12 months, many companies are looking to deploy capital to accelerate growth and gain scale.

Although the practicalities of conducting due diligence and implementing integration plans have made the transaction process longer and trickier, companies are showing signs of cautious optimism.

However, in the post-pandemic era it is unlikely to be ‘business as usual’. Priorities are changing for many stakeholders, including investors, regulators and employees.

According to Herbert Smith Freehills, environmental, social and governance (ESG) issues became a priority for many corporates during the pandemic, given the impact on workers and vulnerable groups. ESG due diligence looks set to become an increasingly important factor in dealmaking through 2021 and beyond, as it will enable companies to meet stakeholder expectations and regulatory requirements in the future, as well as identify potential difficulties that may increase the cost of integration and detract from performance.

Pockets of activity

Given the mass movement to remote working and the increased reliance on the internet, it is unsurprising that the technology sector saw a steady stream of deals throughout 2020 and the first half of 2021. Global tech M&A totalled $634bn, according to GlobalData, a 91.8 percent increase on 2019.

Advanced Micro Devices’ $35bn acquisition of Xilinx and Salesforce’s $27.7bn acquisition of Slack were two of the biggest deals announced in late 2020. In early 2021, Qualcomm agreed to purchase Nuvia for $1.4bn, Citrix acquired Wrike for $2.25bn and Okta agreed to acquire Auth0 for $6.5bn. As the year unfolds, consolidation is expected to continue in the tech space, seen as a key driver of growth, efficiency and innovation.

Sponsor-backed transactions accounted for 26 percent of overall M&A activity in 2020, the highest proportion since before the global financial crisis, according to Refinitiv. With private equity (PE) firms sitting on a record $2.9 trillion of available capital at the end of 2020, according to Preqin, the extent of dry power available could see a spate of transactions in 2021.

Special purpose acquisition companies (SPACs) are also expected to play a significant role after rising activity levels in 2020. According to Morgan Stanley, 248 new SPACs raised $82bn in the US during 2020, more than five times 2019 volume. As of early February 2021, approximately 300 SPACs were still searching for acquisition targets.

Adapting to challenges

As 2020 demonstrated, it is difficult to predict with any degree of certainty exactly what the future holds. While it seems likely that dealmaking momentum will continue in the second half of 2021, acquirers need to focus on key issues.

Areas such as digital transformation and ESG will feature prominently. In the US, the priorities of the Biden administration should also factor into decision making. A proactive approach to any policy shifts will help insulate companies from tax or other financial impacts that could derail deal strategy in the post-COVID landscape.

A further consequence of the pandemic is its impact on global supply chains. While geopolitical tensions and uncertainties will play their part, many companies may seek to bring their supply chains closer to home, which could drive M&A accordingly.

Though valuations may prove challenging, given the strong performance of global stock markets and the volatility of many companies’ earnings, these challenges are expected to ease as the year progresses and the world returns to ‘normal’.

© Financier Worldwide

BY

Richard Summerfield