COVID Seismic Quietness, Mergers and Acquisitions | LPI

When we talk about business, we mostly discuss the volatility inherent in the market’s unpredictable growth. However, we often miss talking about the unpredictability that comes in the form of the delivery of a product or service. Various micro- and macro-environmental factors affect the service delivery and can be described with the acronym PESTLE (political, economic, social, technological, legal, and environmental).

The above factors play a critical role in defining an organisational strategy for organic and inorganic growth. Forward-looking enterprises do not want to lose their market share. To gain investor confidence and increase market share, enterprises adopt either offensive strategies (acquisitions) or defensive strategies (mergers). 

Investopedia defines the term “mergers and acquisitions” as the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions.
 
Seismic Quietness
 
M&A offers a path to growth opportunities. Amid the pandemic challenges, M&A activities saw a phenomenal change that opened the locks to various cross-border or cross-sector deals.

Apart from the chaos, the pandemic forced us to become solution-centric. The progression would have typically taken more than a decade in the normal course of evolution.

According to Bain & Company’s Global M&A Report 2021, “[f]ull-year 2020 delivered meaningful declines both in value (down 15%) and volume (down 11%) vs. the previous year. By region, the Americas was down 25%, the sharpest regional decline; Asia-Pacific and Europe, the Middle East, and Africa ended the year relatively better, with deal value declines of 4% and 6%, respectively.”

Most of the 2020 deals were a direct consequence of the pandemic. As per the Global M&A Report 2021, “2020 was a year that brought us the deepest decline and the strongest rebound in M&A activity, when digital M&A became the new norm, and when both regional decoupling and the strengthening role of regulators continued their momentum.”

In October 2020, Bloomberg hinted that a flurry of M&A activity may have been the result of Joe Biden’s U.S presidential victory.

In September 2020, RIL made headline news for having raised US $20 million from Facebook, Google, KKR, and Silver Lake Partners. The M&A and JV formation were striking, all being strategic investments in AI-powered tech firms and omnichannel platforms.
 
The New Normal and 2021
 
In an article for Reuters, Pamela Barbaglia and Anirban Sen stated that global M&A hit its all-time peak of US $1.52 trillion in Q3 2021. Third-quarter volumes doubled in Europe, with US $473 billion worth of M&A deals, compared with the same quarter last year, while the United States was up 32% to US $581 billion and the Asia Pacific rose 21% to US $365 billion.

In an interview with Kanika Sood, Anthony Macdonald, and Yolanda Redrup, for their article “M&A boom to smash records”, Citi head of corporate finance and advisory and Takeovers Panel president Alex Cartel said “It is the hottest M&A environment we have seen in decades”.

Based on findings from Akin Gump’s survey titled Global Private Equity/M&A Survey 2021: Opportunities Ahead, we can expect:

• Narrowing down the gap between vendor and buyer expectations in deal processes, as almost 70% of the respondents expect M&A valuations to be higher or unchanged, despite the fallout from the pandemic.
• There is substantial pent-up demand for exits going into 2021. More than half of the survey respondents said they have delayed a planned exit as a result of COVID-19, but close to 70% say delays will only be for six to 12 months.
• Dealmakers have vast capital at their disposal and are eager to put deployment schedules back on track. Private equity firms are sitting on US $2.5 trillion of dry powder and, according to PitchBook, SPACs raised a record US $81 billion in 2020 that will need to be invested during the next two years.

In the report, Akin Gump’s NY-based M&A partner David D'Urso states that “[t]here is familiarity now with how the pandemic has impacted businesses. Professional investors are comfortable making investment decisions based on this information, and there is no longer a sense of fear of the complete unknown.”

The Akin Gump survey identified the top-three target sectors based on inputs from private equity respondents. The sectors include:

1. Technology
2. Healthcare
3. Consumer goods 

The least-considered sectors by PE respondents included real estate and retail.
 
Conclusion
 
M&A is considered the fastest path to growth. Apart from market consolidation, other advantages it offers include entering new markets, building scale, removing surplus, and fulfilling unserved demand, as well as driving profitable growth, performance improvement, agility, and flexibility.

Irrespective of government policies and regulatory frameworks, today’s market conditions are largely conducive for M&As. The coming months will see more rationalisation and disruptions.

Authored By: 3NServe 

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