As confidence increases regarding these factors and the new presidential administration, industries such as consumer goods and retail will drive the next wave of deal-making and M&A activity, says Diane Davidson
The year 2020 was one of unprecedented change and an exercise in resilience. While the first two months of 2020 consisted of steady mergers and acquisitions (M&A) deal flow, this economy paused as the global pandemic led to countries’ lockdowns and restrictive travel.
As the pandemic continued from weeks to months, the economy saw an increase in distressed deals consisting of corporate restructurings and bankruptcies. These distressed deals rose from an average of 7% to 30% in April 2020. The three main sectors hit hardest by the pandemic were retail & consumer, hotels, motel and lodging, restaurants, and oil and gas.
As businesses adjusted to the pandemic’s effects, M&A activity began to recover in June and held steady throughout 2020. The sectors with the most activity were technology, media and entertainment, and telecommunications. Some headline-making deals in 2020 included Morgan Stanley buying E*Trade, luxury brand LVMH agreed to buy Tiffany, and Salesforce’s proposal to acquire Slack.
Types of deals
Looking forward to 2021, the primary type of deals will be expansion, consolidation, and desperation deals. The kind of deal is mostly dependent on the sector or industry. In the tech sector, expansion deals are on the rise, which focuses on acquiring businesses to enter new markets and segments. Some notable sales in this area are Facebook’s acquisition of Kustomer, the omnichannel customer relationship platform for $1 billion, and Adobe’s proposal to acquire the project management tool, Workfront.
The financial sector centered on consolidation deals in the second half of 2020. The goal of a consolidation deal is to lower costs through economies of scale and increase operational efficiencies. Morgan Stanley’s acquisition of E*trade demonstrates their desire to scale by serving more clients to respond to consumer pressure to decrease fees. This deal occurred immediately after Charles Schwab agreed to buy TD Ameritrade in an all-stock transaction. The financial services industry will continue to be small. The shrinking pool of providers will impact consumers and raise anti-trust concerns that will slow deal-making progress in the future.
Desperation deals were prevalent in the oil and gas sector as companies joined forces to survive in the economy. Desperation deals will continue as long as global demand for oil and gas production and refined products remains low. Environmental pressures to offer lower carbon solutions will drive some companies to look for businesses that provide innovative capabilities versus building those in-house.
In addition to deal-making, the economy will see an uptick in divestitures. Executives will review their portfolios to determine which businesses align with their core capabilities and strategic vision and those businesses that can succeed elsewhere. Strategic sales typically command a higher valuation and favorable feedback from shareholders. Sellers usually benefit the most from a divestiture as capital can be reinvested and allocated to initiatives that are a better fit for the company. A study conducted by PWC found that many sellers, a year after a divestiture achieved higher earnings before interest, taxes, depreciation, and amortization (EBITDA).
Another major factor is the high levels of cash on corporate balance sheets and low borrowing rates. Analysts predict that 2021 will see a rise in megadeals or transactions of at least $5 billion. The sectors expected to see the most activity are tech, pharma, and private equity. Most of the megadeals in 2020 occurred between companies within the same industry, indicating a desire to increase market size. The expectation is that the same buyer and seller trend within the same sector will continue in 2021.
SPACs will continue to inject capital into the economy. Investopedia defines SPAC or Special Purpose Acquisition Company as a ‘company with no commercial operations formed strictly to raise capital through an IPO to acquire an existing company.’ The year 2020 was a breakout year for SPACs, with more than 50 SPACs being formed and raising around $21.5 billion. SPACs have given sellers funding options that were previously unavailable and the ability to partner with industry experts. Goldman Sachs, Credit Suisse, and Deutsche Bank were involved with SPACs. A typical SPAC timeframe is two years to complete the acquisition or the funding returned to investors.
The outlook for 2021 is a continued increase in M&A activity following the trends of 2020. According to a PWC study, corporate executives are optimistic about the recovery, with 53% of US CEOs stating their plan to increase M&A in the upcoming year. As confidence increases regarding these factors and the new presidential administration, industries such as consumer goods and retail will drive the next wave of deal-making. SPACs and private equity firms will continue to play a large role in the recovery and offer a much-needed influx of capital.
Diane Davidson is the owner of Clever Fox Advisory (www.CleverFoxAdvisory.com). She is a certified Six Sigma Green Belt focused strategic initiatives aimed at improving finance operations. She works with Fortune 500 companies on large-scale transformation projects. When she is not at work, she can be found sailing around Lake Michigan.