Global M&A: Chasing records?

I recently had the pleasure of attending the 2021 Milken Institute Global Conference. It was so refreshing to be able meet so many leaders across health, finance, technology, philanthropy, industry, and media in person. But, more importantly, to have the opportunity to discuss the world’s most urgent challenges and how we can all come together to help businesses, governments and society realize the exciting opportunities that can come out of them.

With global M&A hitting a record setting US$4.2t through the end of September, it is no surprise that the transactions market outlook was firmly on the Conference’s agenda. I had the opportunity to discuss the current market and what may be behind this turbocharged activity on a panel alongside leading industry figures.

As we discussed on the day, to understand the pace and volume of deals we have to step back to the start of the COVID-19 pandemic. In March 2020 when the full realisation of the crisis first hit and economy after economy around the world closed, companies went into crisis management mode. They stopped their deal plans and focused on navigating a unique set of issues.

Once the immediate emergency had been navigated, those companies then put those plans back into action. We saw an explosion of deals starting in July 2020, some deals that were on pause being restarted, but a steady and accelerating flow of new deals as companies plotted a new path to growth.

One aspect of this response was that the majority of companies not only conducted a comprehensive strategic and portfolio review, but that these were accelerated solely due to the COVID-19 pandemic.

Companies were taking a long hard look at themselves, and where they anticipated their industry was going to be in two or three years’ time and began to plot that path from strategy to transformation. They were looking to accelerate plans to address issues that existed prior to the pandemic. The experience of the crisis accelerated and magnified these issues and added that extra impetus for CEOs to pull the trigger on deals.

Look at fintech. It is not new. But many companies in financial services decided that it was now or never to push the button on acquiring the assets and capabilities to accelerate their own adoption of those differentiating client offerings – and M&A was the quickest path. We see this in automotive, in life sciences – really across all sectors.

It is this reset of strategy to transformation that is driving deals today.

What type of deals are we seeing and what are the drivers?

This really is a broad based upswing. By geography, sector, and buyer type. The US has extended its dominance of M&A, but we see a pickup across Europe, especially the UK, and across Asia, with Australia having a strong bounce.

Technology has also become more important to the health of M&A, but we see strong performances in FS, life sciences, industrials, logistics and the wider energy sector.

This rebound in deals is also different to other peaks we have seen. It is not driven by the US$100b+ deals, but by deals in the US$1b-US$10b range aimed at accelerating strategic agendas. We’ve seen both double compared to what we saw pre-pandemic. These are significant deals being done, but maybe not catching the headlines as with the mega-mega deals back in the prior strong year of 2015.

But underneath these broad trends we see that desire to buy the capabilities to accelerate the strategic transformation to position for growth in the future. As the panel said on the day CEOs are using M&A to chart a new course – the Milken Conference’s theme.

And a constant issue that comes up in conversations with CEOs is that they are doing deals to broaden the range and scale of products and services they offer to help attract and retain customers. Again, a lesson from the pandemic was to build resiliency – especially in customer relationships.

But it is not just strategic corporate buyers driving the record level of deals. Private Equity (PE) has also been on a strong buying spree with US$1.3t of dry powder allocated to buyouts. PE investors have acquired more than US$800b of assets in 2021, a record year, topping even the PE boom years of 2006 and 2007. The difference today is that PE firms are in many instances acquiring assets to accelerate the transformation of existing portfolio companies. They are taking a longer-term view on value creation, similar to that of corporate buyers.

Another tailwind for M&A has been the emergence of SPACs as an alternative route to capital for companies. Again, this is not a new aspect of the market, but today’s SPAC acquirers are very different to those before the pandemic. They are buying a range of assets, from tech start-ups through to mature industrial assets spun out of larger corporates. With more than 400 SPACS seeking targets this will be a maturing trend that offers a strategic alternative for companies looking to raise capital.?

How are sustainability and ESG feeding into M&A?

Sustainable businesses will be the new winners in the world beyond the COVID-19 pandemic. It was an issue before, and it is another megatrend that has accelerated over the past 18 months. Companies need to think beyond carbon to a wider range of ESG issues – and these will be different across sectors and geographies. Underpinning all these risks is the growing evidence that employees, society, government, and other stakeholders are setting new rules for companies to operate within.

We’ve seen a strong uptick in deals in the renewables space, but that is just one aspect. Across all sectors we see a strong desire to buy assets that accelerate company sustainability strategies, especially in automotive, industrials and consumer.

But it is wider than just one sector. It is about M&A and deals themselves. An increasing ask from businesses is advise on ESG related due diligence – how will buying an asset impact a company’s ESG score or sustainability reputation. This is becoming a critical lens to view deals through.

What is the outlook for global M&A?

Because of the strategic drivers behind this cycle of dealmaking it looks set to continue.

CEOs are still trying to understand the new market dynamics. With US$6.7t deployed through M&A since the market picked up in July 2020 and many companies undergoing a major transformation, pre-existing competitive landscapes have been redrawn across all sectors. Companies have also invested heavily in their existing operations, especially digital and differentiating capabilities.

This means all companies are reconfiguring their ecosystem for maximum growth and resilience - the experience of the pandemic has been a wake-up call for many companies. They also need to holistically review their wider ecosystem – including technology, assets base, suppliers, partners, and customers – to position for the new reality. There will likely be a pickup in both M&A and alternatives, such as JVs and alliances. The need to act is just too strong for CEOs to stand still.

While we may not see the record numbers month after month, this M&A market is different to any we have witnessed before. The number and scale of deals going through are also reshaping the sector landscapes, which should drive even more activity.

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