The emerging trends as the M&A recovery continues
What can we expect now that conditions are strong for a resurgence in deal activity?
The enhanced digitalisation of businesses and services is making its mark across the US, Asia and Europe. Photograph: Getty
Last year was a tumultuous one for M&A across the globe but, as 2021 begins, geopolitical events will see the various markets affected in different ways – both positively and negatively.
There is no doubt that Q1 2020 witnessed one of the biggest and most sudden disrupting events the global M&A market has ever experienced, says Éanna Mellett, head of Corporate, DLA Piper Ireland.
“But, just as it has with all geopolitical events to date, the M&A market has adapted and recovered.”
Mellett has seen different trends emerging as the recovery continues. “‘Locked box’ pricing mechanisms have always been rare in US transactions. Outside the US, many predicted there would be a significant shift away from locked box pricing mechanisms towards completion accounts. But, although our statistics show that there has been a move to completion accounts away from locked boxes, the change has not been as significant across non-US deals as many expected.”
Ed O’Dea, private industry commercial director with Davy, says, overall, global M&A reduced year on year with M&A value down by 18 per cent and volume down 14 per cent compared with 2019. “For the first time in living memory, a global pandemic was new to all market participants and this led to a reduction in confidence and hence deal-making.”
But conditions are now strong for a resurgence in deal activity in each market, he believes. “We understand Covid implications on companies’ performances, stock market valuations are exceptionally strong, vaccine rollout is starting, investors are seeking returns in a low yield environment and credit is cheap which leads to higher valuations for strong well-diversified companies.”
Anya Cummins is head of Deloitte Private and a partner within Deloitte’s M&A Advisory. She says that as the impact in M&A activity has been largely sector-specific to date, this will continue to be the case, and similar trends have been seen across the US, Asia and Europe, such as the hugely enhanced digitalisation of businesses and services making its mark.
“When we talk to our M&A colleagues globally, there are very similar themes with private equity driving deal volume around the world and a huge availability of capital,” says Cummins. “There’s always going to be domestic-specific factors which will influence transactions and transactional activity but, overall, I think our view is a strong deal-making level in 2021.”
The hope is that 2021 will bring stabilisation across the different markets but Katharine Byrne, partner in corporate finance at BDO, does not think the recovery will be so equal. While many regions experienced a remarkable rebound in transaction levels in the last quarter of 2020, there are some regions that are still lagging such as Australasia, Latin America and Africa, she says.
“This is attributed to the second wave of Covid-19 compounded by ongoing political uncertainties in some of these regions. The uptick in M&A is expected to continue into 2021 for countries with a vaccination rollout plan and where government supports continue to sustain businesses. Any further vaccination delays or misguided government policies will certainly impact on confidence levels which, in turn, will stall M&A activity.”
And, more broadly, as an increasing number of countries introduce tough travel restrictions, this lack of face-to-face deal-making will hinder the rebound of cross-border transactions, Byrne says.
“Increased use of AI and data analytics as well as digital execution of contracts has helped streamline the M&A process but where people and management teams are driving the business, the personal interaction is key to the success of the transaction, especially where the management teams need to implement integration plans. It is likely that mid-market M&A activity will slow down if borders continue to remain closed for long periods.”
The final quarter of 2020 saw a huge rebound in investor activity, no doubt buoyed by a change in leadership in the US. Events such as the divisive American presidential election and US-China relations had an impact on M&A activity, says O’Dea. “The Democrat win is seen as a positive for investor confidence on which M&A transactions thrive.”
The resurgence of deal activity in the fourth quarter of 2020 was driven by a number of “megadeals”, including S&P Global’s $44 billion (€36.4 billion) acquisition of IHS Markit, AstraZeneca’s $43 billion acquisition of Alexion Pharma, and Salesforce.com’s $29 billion acquisition of Slack Technologies. However, North America, which had seen its global market share steadily rising over the years, saw its deal value decline substantially (from 50.5 per cent to 41.9 per cent) while remaining the same on deal count (33.3 per cent).
The biggest gainer in 2020 was Asia (including Japan), which saw its global market share rise in both value and volume (up by 7.4 per cent and 2.2 per cent respectively). Many observers believe the region to be leading the way out of the crisis, mirroring its relative success in controlling the pandemic. China has eased restrictions on specific industries as it seeks to boost foreign investment. And, although Australasian M&A activity remained low in 2020 due to the pandemic, activity in 2021 is largely expected to increase as investor confidence improves from the vaccine rollouts, greater political stability in the US and businesses adjusting to the “new normal” working environment.
Europe also saw its share of global deal value increase to 26.8 per cent (from 23.7 per cent) while registering a small decline in overall deal count. Total M&A deal values in the EMEA region were higher in the second half of the year than in the first half, but lagged behind compared with Asia-Pacific and the Americas as the continent was forced to engage in rolling lockdowns. Brexit, of course, had a huge impact on certainty but, as the market settles and following the agreement of a trade deal, this may be addressed. Indeed, according to a BDO report, the UK and Ireland remains an attractive region for international overseas investors, with eight out of the 10 top mid-market deals by size in Q4 2020 involving overseas bidders. Africa, by contrast, experienced a significant slump as a resurgence in Covid-19 activity hit deals.