The growth in year-over-year (YoY) value of M&A deals recorded since the beginning of Q3 is likely to continue into 2021, as companies position themselves for improved economic activity and reframe their future for the post-COVID-19 pandemic era, said EY recently.
With an overall value of US$2.9 trillion, global M&A in 2020 is tracking below 2019’s value of US$3.3 trillion, but still ranks fifth for value of deals in the post-global financial crisis period, according to EY research looking at global M&A trends in 2020 and the outlook for transactions in 2021 released lately.
M&A activity has varied across regions, with values in Asia Pacific slowing dramatically in the first two months of 2020 before finishing the year with an increase of 19% to US$805 billion, EY pointed out.
In the Americas, M&A values declined by 29% to US$1,27 billion, with the US market seeing a fall of 80% at the height of the lockdown compared with 2019. In EMEIA (Europe, Middle East, India, Africa), the decline in deal value is more limited (3%) to US$815 billion, with the region having regained most of the lost ground from earlier in the year.
The most active sectors
The most active sectors were technology, media and entertainment and telecommunications (TMT) with 5,755 deals valued at US$973 billion (up 6% YoY), financial services with 901 deals valued at US$352 billion (up 8% YoY), and power and utilities with 525 deals valued at US$142b (up 34% YoY).
Sectors that have been most exposed to the COVID-19 pandemic have seen a more marked slowdown in 2020, as a result of lockdown restrictions and economic slowdown. The industrials sector (down 18% at US$262 billion compared with 2019) and consumer sector (down 16% at US$156 billion during the same period) were particularly exposed.
An increase in activity in the second half of the year was largely expected, but the rebound in global M&A following the COVID-19 pandemic related stall has been stronger, quicker and more sustained than many could foresee, said Andrea Guerzoni, EY Global Vice Chair – Strategy and Transactions.
“There has been a boldness in the deals announced post-July with the aim to combine assets to offer a broader and deeper array of products and services to customers being the common thread,” Guerzoni pointed out. “As businesses look to build resilience to withstand any future shocks or crises, transactions across all sectors have focused on capturing long sought-after capabilities and building new routes to market, rather than capturing market share.”
Bold sector moves to define the market in 2021 and beyond
Looking ahead to 2021 and beyond, the sectors that showed deal-making restraint during the COVID-19 pandemic will drive the next wave of activity, according to the EY research.
For example, the consumer sector has seen an increase in M&A involving assets that struggled through the COVID-19 pandemic, led by more financially resilient competitors, while acquisitions driven by innovative companies with a strong link to their customer base have also emerged, EY said.
Private equity firms have also been active in 2020, and they will likely be even more so as businesses and sectors reposition themselves during the anticipated recovery stage in 2021 and beyond, EY predicted.
With US$2.8 trillion in dry-powder available, including nearly US$1 trillion dedicated to buyouts, private capital is well-positioned to take advantage of the value creation during anticipated 2021, the firm observed.
The growing presence of special purpose acquisition companies (SPACS) in the market could bring other forms of capital to the deal table next year, EY said.
In addition, the growing trend for alternative deal models, such as joint ventures and alliances, as companies take an ecosystem view, as well as divestments to enable strategic business shifts and reinvestment, are also expected to fuel deal making intentions, the firm added.
Impact of technology and geopolitics to inform corporate strategies
The expected increase in M&A activity comes as nearly two-thirds (62%) of executives believe that their organisations must radically transform their operations over the next two years, according to the EY Digital Investment Index.
To achieve that, they are starting to turn to emerging technologies, with the internet of things (IoT), artificial intelligence (AI) and cloud computing among the most likely investments in the next two years (67%, 64% and 61%, respectively), EY said.
Geopolitical changes will also inform strategic capital decisions, such as M&A and entering or exiting certain markets.
According to the EY 2021 Geostrategic Outlook, analysing these risks is becoming more important in the current environment, with the COVID-19 pandemic acting as a great accelerator for geopolitical change overall.
In Europe and the US, variables such as Brexit, and the impact of any new policies as a result of the US election outcome, will play a key role in how executives are rethinking their corporate strategy and capital allocation, EY added.
Whether it’s technology or geopolitics, disruption in many guises creates fuel for deals and strategic investments, Guerzoni said.
“CEOs need to navigate complexity and plan for tomorrow by activating real-world strategies today,” she advised. “This stop-start year has been a surprisingly resilient one for deal-making, considering the uncertainties. But, with conditions ripe to support M&A, including low interest rates, ample funding and a sense of greater certainty going into next year, we can expect 2021 to start off on a strong footing and accelerate from there.”