My M&A Predictions for 2021
My M&A Predictions For 2021
Amidst a global pandemic, statewide lockdowns, a globally followed U.S. presidential election, and enormous business uncertainty, 2020 has been a time unlike anything I ever witnessed. The COVID-19 pandemic has generated colossal personal hardship, while its second wave and continued spread extends to affect each aspect of life and business — including the mergers and acquisitions market. In this post, i provide my M&A predictions for 2021.
2020’s V-Shaped Recovery
Dealmakers started 2020 with a healthy and regular deal flow till late Q1 when several sell-side transactions halted due to the incipience of the COVID-19 pandemic. However, a marked rise in distressed deals, including company restructurings and bankruptcies, increased from 7% to 30% by the close of April.
The challenging economic circumstances, coupled with enhanced investment in environmental, social, and governance (ESG) factors, resulted in active dealmakers exercising a more meticulous approach to due diligence.
Following the initial market downturn, the volume of M&A deals started to increase again in May, ultimately improving. This resurrection was due in considerable part to dealmakers remaining “deal ready” during the height of the pandemic, enabling them to pick up where they left off before the downturn and finished pending deals quickly.
With an overall value of US$2.9 trillion, global M&A in 2020 is trailing below 2019’s value of US$3.3 trillion yet still stands fifth for the value of deals in the post-global financial crisis period. The M&A activity has fluctuated across regions, with values in the Asia Pacific stalling dramatically in the initial two months of 2020 before closing the year with an improvement of 19% to US$805 billion. In the U.S., M&A value decreased, with the U.S. market witnessing a drop of 80% at the lockdown phase contrasted with 2019.
The most dynamic sectors were technology, media and entertainment and telecommunications (TMT) with 5,755 deals estimated at US$973 billion (up 6% YoY), financial services with 901 deals assessed at US$352 billion (up 8% YoY), and power and utilities with 525 deals priced at US$142b (up 34% YoY).
Sectors most vulnerable to the COVID-19 pandemic have witnessed a more marked slowdown in 2020 due to lockdown restraints and business slowdown, with the industrials and consumer sectors individually exposed. As enterprises look to develop resilience to resist future shocks or crises, transactions across all sectors have concentrated on obtaining sought-after capabilities and developing new routes to market, rather than winning market share.
My M&A Predictions for 2021: What to Anticipate?
The COVID-19 pandemic also revolutionized how we work, redefining the conventional industry and business practices. Video conferencing is presently the norm, displacing local in-person meetings and those we might have traveled. Beyond remote communication technology, the COVID19 crisis has highlighted the necessity for tools that empower dealmakers to execute M&A processes successfully — no matter their location. Recent acquisitions, including Salesforce’s $27.2 billion plan to acquire Slack, Cisco’s announcement to acquire Slido, and Facebook’s strategy to acquire Kustomer, are simply some of the latest instances of this.
However, different economic, governmental, and medical factors will direct the activity of the 2021 M&A market. In my view, the availability of a reliable and effective COVID-19 vaccine, besides the likelihood of an added government stimulus, will dictate M&A over the next 12 months. With a second stimulus package in the negotiations phase, refinancing and renegotiating debt would increase, adding to an overall deal volume improvement in 2021. The possibility of tax reform under the Biden administration would also be a factor in US M&A.
There will be additional shifts in the global M&A market. The Asia Pacific, driven by China, would surpass North America as the most significant destination country for M&A investment by the close of 2021. Additionally, the current rise of special purpose acquisition companies (SPACs) as desirable alternatives to restructuring would continue. Ultimately, concerns about environmental, social, and governance (ESG) factors would be the chief factor to thwart a deal in 2021.
In 2021, the sectors that recorded deal-making caution during the COVID-19 pandemic will drive the subsequent M&A surge. For instance, the consumer sector has witnessed an uptick in M&A, including assets that grappled through the COVID-19 pandemic, driven by more financially resilient competitors. In contrast, acquisitions get driven by innovative businesses with more substantial customer bases.
Private equity firms have likewise been active in 2020, and they will possibly be still higher so as businesses and sectors reposition during the likely recovery stage in 2021 and beyond. With US$2.8 trillion in dry-powder ready, including approximately US$1 trillion committed to acquisitions, private equity is in a better position to take advantage of the value creation during 2021.
Besides, as enterprises take an ecosystem view, the growing trend for alternative deal models, such as joint ventures and alliances, would rise, including divestments to facilitate strategic business shifts and reinvestments.
My M&A Predictions For 2021 — Innovate Or Perish In 2021
For ages now, analysts have recommended that an overwhelming digital transformation is needed for many businesses if they have any prospect of future-proofing themselves. 2020 brought this reality into stark focus, revealing how swiftly companies can disintegrate when confronted with the pressure to keep with the industry’s agile disrupters.
Microsoft, Apple, and Amazon, and many others have demonstrated that they have what it takes to shift their technology stack to satisfy customers’ evolving needs. But, many companies haven’t been able to pivot with almost as much steam. Many businesses will need to discover that companies invested most in developer talent, and marketing will be the ones with a definite advantage in the years ahead.
My M&A Predictions For 2021 — Changes In Deal Structures
2020 has generated substantial pent-up demand for acquisitions (and some significant war chests among corporates in many industries). I suspect M&A activity in 2021 to begin to more hostile bids by companies looking to rise from the crisis as consolidators. The volatile macro outlook generates additional challenges, with earn-outs and contingent value rights frequently being employed to bridge gaps among buyers and targets amid diverging forecasts for the target’s performance. Moreover, parties whose transactions are taking longer to close due to the more complex antitrust and foreign investment landscape must focus on the interim operating covenants and regulatory risk allocation mechanisms in their deal agreements as they look to control their exposure.
My Final Thoughts
Overall, favorable interest rates and the prolonged availability of capital are estimated to boost M&A action in 2021 — even if dealmakers travel less and continue to operate remotely.
For industries that have low growth, there would be potential for consolidation. Significant trends accelerating consolidation are strategic diversification (e.g., 5G, infrastructure), growth-focused on industries (e.g., automotive), and portfolio pruning that drives to the diversification of non-core assets (Intel’s NAND sale). Firms are placing themselves for growth through mid-to-high growth areas, including 5G, data centers, cloud computing, industrial IoT, and automotive — spaces where I anticipate deal activity to continue in 2021.
Innovation would drive growth initiatives. For instance, Global investment for autonomous cars has exceeded $7 billion for businesses like Waymo, Zoox, Baidu, Didi, and AutoX, while Tesla develops its driverless car technology. I expect this technology’s activity to last, including substantial amounts of funding, high valuations, and acquisitions as firms strive to stay ahead of the game and distinguish themselves.