Following a rollercoaster year for mergers and acquisitions (M&A), the increase in year-over-year (YoY) value of 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. This is according to EY research looking at global M&A trends in 2020 and the outlook for transactions in 2021.
- Stronger than expected rebound in global M&A value since July 2020 set to continue into 2021
- 2020 ranks fifth for total transactions’ value in the post-global financial crisis period, despite M&A collapse in 1H20
- Huge shift in consumer behavior to drive dealmaking as businesses look to reframe their future
According to the research, with an overall value of US$2.9t, global M&A in 2020 is tracking below 2019’s value of US$3.3t, but still ranks fifth for value of deals in the post-global financial crisis period.
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$805b. In the Americas, M&A values declined by 29% to US$1,27b, with the US market seeing a fall of 80% at the height of the lockdown compared with 2019. In EMEIA, the decline in deal value is more limited (3%) to US$815b, with the region having regained most of the lost ground from earlier in the year.
The most active sectors were technology, media and entertainment and telecommunications (TMT) with 5,755 deals valued at US$973b (up 6% YoY), financial services with 901 deals valued at US$352b (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$262b compared with 2019) and consumer sector (down 16% at US$156b during the same period) were particularly exposed.
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 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.
Private equity (PE) 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. With US$2.8t in dry-powder available, including nearly US$1t dedicated to buyouts, private capital is well-positioned to take advantage of the value creation during anticipated 2021. The growing presence of special purpose acquisition companies (SPACS) in the market could bring other forms of capital to the deal table.
In addition, the increasing 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.
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 organizations 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). With 52% of executives who pursued digital technologies via M&A saying that the approach exceeded expectations and 45% reporting similarly for digital partnerships, 2021 is set to see an increase in deals, corporate venture capital and partnership investments.
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. With M&A values in the UK already up 40% in 2020, and with 79% of US companies indicating that they are likely to accelerate M&A strategies, alliances and joint ventures if corporate tax rates increase following the presidential election, the
Commenting on the survey findings, Stelios Demetriou, Partner and Head of Strategy and Transactions Services at EY Cyprus, stated: “The rebound in global M&A activity in the second half of 2020 was stronger, faster and more sustained than many could have predicted. This follows from a sharp fall in the first half of the year driven by the pandemic. As businesses seek to build resilience in order 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. In this context, executives are primarily focusing on emerging technologies, with the internet of things (IoT), artificial intelligence (AI) and cloud computing among the most likely investments in the next two years.”