M&A activity was surprisingly resilient in 2019 though volatile economic activity led many executives to adopt recession footing, said Bain & Company recently.
Deal activity in Europe and Asia was adrift in the first half of the year before rebounding while the US started strong before it plateaued, the firm noted.
While the number of 2019 deals ended 2% lower than 2018 levels, final corporate M&A deal value last year reached $3.4 trillion – not a weak year by any measure, said Les Baird, who leads Bain & Company’s global M&A and Divestitures practice and co-author of the firm’s annual corporate M&A report.
While M&A activity was still strong, some of the old norms governing M&A are evolving, the firm pointed out.
On the geopolitical front, Brexit and trade wars significantly lowered any appetite for cross-regional deals by 31% during the first nine months of 2019, versus the same period in 2018, according to the report.
This continued a three-year decline in cross-regional deal volume, Bain said.
“Despite slowing economic growth last year, capital conditions remained favorable with low interest rates,” said Baird, “We expect the interplay of economic growth and cost of capital to continue to determine the fate of deal volumes in the year ahead.”
Scope deals are promising
The fundamental justification for many deals has now shifted to a scope orientation, or those focused on getting into faster-growing lines of business or acquiring new capabilities – digital and otherwise – to strengthen the existing business or for innovation, according to Bain.
Scope deals now account for roughly 60% of all strategic deals valued in excess of $1 billion, versus the 40% in 2015.
Scope M&A deals have accelerated over the past five years in response to the low-growth environment and business model disruption across several industries, most notably healthcare, technology and consumer products, said Andrei Vorobyov, the report’s co-author and an M&A expert, based in Europe.
“We finally saw the balance tip toward this trend in 2019, which indicates many executives are shifting their portfolios from successful but slower-growing legacy businesses to new growth engines,” Vorobyov noted. “They are also adding new capabilities, especially digital, such as omni-channel customer experience, artificial intelligence, and big data analytics or robotics, to drive growth.”
Meanwhile, many industries are reaching their natural limits on consolidation, making it more difficult to get deals approved, Bain said, adding that scale deals remain a proven route to building and extending a leadership position in chosen businesses.
Scale deals accounted for about 40% of all deals valued at more than US$1 billion in the year ending September 2019, according to the report.
In many industries, such as financial services, manufacturing and natural resources, where further consolidation is feasible, scale deals remain an effective way to stave off earnings pressures for the short term, Bain said.
In others, such as media and telecom, digital disruption is actually causing incumbents to join forces and use their combined scale to invest in new capabilities, the firm added.