Cross-Border Retreat
Financial markets experienced the longest bull run in history between the Global Financial Crisis in 2009 and Covid-19 lockdown in 2020. This decade-long phenomenon accelerated M&A activity, motivating many corporate dealmakers to implement ambitious growth plans. The M&A market seemed to defy gravity through a potent combination of strong share price performance driving high ratings, long-term incentive structures and unprecedented access to corporate debt.
Globalisation led ambitious, modern-day empire builders to intensify corporate efforts to consolidate industries. Acquisition after acquisition, the C-suite saw opportunity to grow the topline, take out cost, manage ever-rising EPS, drive cash generation and dividends, and deliver multiple arbitrage at scale. Across many industries corporate conglomerisation returned in force in the 2010s, with highly diversified, highly acquisitive groups locked in a cross-border, modern-day landgrab.
One major challenge to the new wave of conglomerates was the parallel rise of private equity. The noughties and 2010s saw the coming of age of private equity and a number of the more successful franchises evolved from “private equity managers” to “diversified asset managers” with multi-strategies across equity (growth, development capital, buyout, partnership and succession capital), through to debt (special situations, senior secured, intermediate, mezzanine, asset-backed), and real estate. These firms became increasingly global too and the dry powder of private equity enabled managers to once again out-bid corporates despite the synergistic advantages of conglomerisation.
A second blow to corporate M&A ambitions was the rise of the activist. Funds were raised to identify value opportunities, and listed corporates that had become overly diversified were prime targets. High profile campaigns were waged to gain Board seats and drive management change, but also to secure simplification of the corporate’s business activities (and specifically “M&A campaigns”). Activists have demonstrated aptitude at triggering strategic reviews and break-ups of diversified and complex structures. Elliot’s high-profile win on the Costa divestment that streamlined Whitbread, and Cevian’s push for divestments at ABB and Cookson, among countless other front-page examples have taken the wind from the sails of certain, highly acquisitive corporates.
Further to the explosive growth of private equity and activist shareholder dynamics, corporates are now also conforming to late cycle or end-of-cycle norms. The economic cycle is analogous to a marathon whereby there is strong momentum in the beginning but by the end certain “runners” begin to flag and even fall exhausted as they “hit the wall”. In the same way, the so-called “late cycle” does see corporates that have been on an M&A buying spree run out of steam and seek divestments. Whilst there are going to be many reasons for high profile divestment programmes, it seems to me imminent ”falls” will include Hain Celestial’s planned exit from its UK business, Ferrovial’s planned exit from Amey and the divestments British Telecom has initiated in the UK, Ireland, Italy and Spain.
On the horizon, the biggest ever catalyst of a “cross-border retreat” could potentially be the result of our new post-Covid-19 reality. Whilst there is some speculation that the easing of the pandemic will be a boon for corporates with fresh momentum for strategic acquisitions, the reality could well be rather different. We are already seeing globalisation falling out of favour with protectionist impulses permeating the Board room after serious shortcomings were exposed in global supply chains. So one byproduct will likely be a “cross-border retreat”, with corporates returning to basics and retrenching, divesting of far-flung overseas holdings. Many of these situations were already anticipated prior to lockdown but one suspects that the pandemic will act as a catalyst for new, unanticipated turns in the market.