Boom time: riding the seventh great ‘M&A wave’

November 2021 | FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

November 2021 Issue

Despite widespread COVID-19-induced economic uncertainty, 2021 has seen a major uptick in global merger activity, with some even characterising the proliferation as the seventh great ‘M&A wave’.

Certainly, the increase in deal activity has been considerable. According to Mergermarket’s ‘Global & Regional M&A Report 1Q21’ global activity in the first quarter of 2021 reached $1.16 trillion in transactions, making it the “most active annual opening” on record.

“Carrying forward the momentum of 4Q20, global M&A activity turned in a strong first quarter performance,” asserts Mark Druskoff, data-driven content coordinator for North America at Mergermarket. “While many themes crossed over into 2021, such as the technology sector’s dominance and the continued strength of private equity, some notable shifts did occur in terms of deal size and geographic concentration of deals.”

Drilling down, the US reached its highest market share in 14 years in 1Q 2021, netting 54.4 percent of global deal value (up from 48 percent) in 4Q 2020. There were at least 1595 deals worth $563bn recorded in 1Q21, up slightly by value compared to the previous quarter (1708 deals worth $554bn in 4Q20). The largest deal in the US was AerCap Holdings NV’s $31bn acquisition of GE Capital Aviation Services Inc.

European M&A activity has also been strong, with a total of $291.3bn spent on European firms in 1Q21. This represents a 51.4 percent increase by value on the equivalent period in 2020. The largest deal in Europe so far this year saw National Grid acquire UK-based utilities firm Western Power Distribution from PPL Corporation, in a deal worth $19.8bn – the only transaction in Europe worth more than $10bn so far this year.

Other jurisdictions, such as Asia-Pacific, Latin America and the Middle East and Africa, also saw significant deal value and volume, with $163bn across 861 deals (excluding Japan), $26.9bn across 153 deals and $32.7bn across 110 deals, respectively.

“In light of this ‘new normal’, companies are looking to reposition their businesses – driving deal activity both by divesting non-core divisions and by acquiring new capabilities.”

“The record M&A volumes seen in the first half of 2021 have been driven by very supportive macroeconomic conditions, namely the lower cost of capital provided by the low interest rate environment,” adds Maxwell Johnston, head of M&A at the Apex Group. “This has enabled acquirers to raise net debt efficiently and be supported by the substantial amount of ‘dry powder’ raised by private equity and alternative markets to be deployed for acquisitions.”

Adapting to the ‘new normal’

While M&A activity was clearly curtailed in 2020 by the severe sectoral impacts caused by coronavirus (COVID-19), the effect of the pandemic has been much less marked in 2021, with cross-border deals particularly significant, having contributed a record $516.6bn in the first three months of 2021.

“The uncertainty of last year led to a hiatus in transaction volumes, however as we learn to live with the ongoing global pandemic, including limited business travel, many of these transactions have been revived,” notes Mr Johnston. “Deals which were postponed in 2020 have now returned to the market, leading to a condensing of activity and a spike in volumes.

“While industries such as hospitality, travel and manufacturing have been hit hard by the pandemic, others such as healthcare, technology and financial services have emerged as resilient revenue-generating sectors,” he continues. “COVID-19 was the ultimate black swan stress-test and those businesses which survived and even thrived, with demonstrable long-term revenue stream visibility, are attracting capital.

Furthermore, in light of this ‘new normal’, companies are looking to reposition their businesses – driving deal activity both by divesting non-core divisions and by acquiring new capabilities. “We are seeing many corporates, as well as private equity investors, looking to realign their businesses and portfolios to benefit from the post-pandemic recovery and position themselves for future growth,” adds Mr Johnston.

Sustaining the boom

Although some sectors remain subject to a pandemic hangover, the bounce back in global M&A activity seen in 2021 has been nothing short of remarkable, with many speculating as to how long the current boom is likely to be sustained.

“We expect the high volumes of M&A activity to continue for the remainder of 2021,” forecasts Mr Johnston. “I also expect to see fewer ‘mega-mergers’ or transformative acquisitions, especially in the financial services sector. In addition, consolidation will continue in the second half of 2021, alongside the careful integration of acquisitions made in the first half of the year.”

Despite positive forecasts, however, Mr Johnston does sound a note of caution. “Those operating in the M&A market should not be swept away by the welcome positive sentiment – discipline is key,” he advises. “Competition for good quality assets has never been higher, and buyers and their advisers must remain focused and prepared to walk away if necessary from overheated auction processes and inflated valuations.”

Seventh great ‘M&A wave’ or not, the appetite for M&A is undoubtedly strong and dealmakers and business leaders alike need to be ready to act quickly to capitalise on a wealth of opportunities amid the current boom.

Fraser Tennant