The Impact of the Pandemic on Global M&A
Aug 12, 2021
After historic lows in the first half of 2020, M&A activity bounced back with unexpected vigor through the second quarter, launching into record values in 2021. How did the pandemic affect M&A, what are the reasons behind the current highs, what was the impact of mergers and acquisitions on markets, and what should we expect going forward? We take a look at this article.
M&A market dynamics after the pandemic
M&As hit disappointing landmarks in 2020. With the lockdowns, the atmosphere of uncertainty, and the collapsing market of the early pandemic, M&A activity dropped sharply. The number of deals and their values dropped to decade lows in Q2.
Deal-making was put on hold while everyone waited to see how the pandemic would affect various industries and the financial markets.
However, once restrictions started to ease, and with the prospect of early vaccinations, the market rebounded quickly. From June to October, deals totaled $1.4 trillion — up 84% over the preceding five months.
By December, Bloomberg reported¹ a robust $3.5 trillion in M&A value: a 6% drop over 2019, but an impressive number given that nearly two-thirds of that activity happened after July. The atmosphere was one of opportunity, and companies rushed back to the game.
Fast-forward to mid-2021, and the momentum shows no signs of abating. With mergers and acquisitions at a historic high, over $2.6 trillion worth of deals have closed globally as of July — not far short of the $2.8 trillion generated in all of 2020.
North America has been the main force behind the recovery, responsible for $1.4 trillion in M&A value, but the numbers are fantastic for the Asia-Pacific region as well as Europe. Both showed a nearly 30% increase in value over their 2015-2019 averages: 446 billion and 412 billion respectively.
PwC’s survey of over 5,000 CEOs worldwide found that 76% are optimistic about the prospects of economic growth over the next 12 months. Some fields in particular, like technology, expect record M&A activity through 2022. The enthusiasm is palpable.
What caused the M&A recovery in the 2nd half of 2020
For the M&A world, 2020 looks like two very different years. After the drought of the first half came a sudden and torrential flow of activity. What caused the reversal?
Although hard to notice at first, the air was rife with opportunity even during the lockdown. As Anu Aiyengar, co-head of Global M&A at J.P. Morgan, points out in a recent interview for the Financial Times, apart from COVID-19, the environment was good for deal-making: high equity markets, low interest rates, and lots of potential growth on the horizon.
Rusty Wiley, writing for Nasdaq, attributes the successful recovery to dealmakers’ focus on remaining “deal-ready” opportunities despite the pandemic. This is echoed by Anu, who talks about “a lot of creativity in due diligence” and a “tremendous amount of innovation” as essential causes for the robust second half of 2020.
Other, more tangible factors include a surge in the stock market, which, coupled with low interest rates and strong capital markets, produced the right conditions for big M&A moves. On the other hand, the crisis also devalued many acquisition targets—lower prices, easier buys.
Politically, the US elections were considered a stable result, fortifying market confidence. As the rolling out of vaccines approached, a general feeling crept up that the worst was behind us.
All these factors influenced decisions. However, perhaps the reason most worth emphasizing is technology. Video-conferencing software—with Zoom being the success story of the year — and remote work platforms sprang to the forefront. Virtual data rooms allowed due diligence to continue as before — sometimes faster than before.
“Five years ago, I would never have thought a deal could be concluded this way,” Jens Bjorn Andersen, CEO of Danish DSV, tells Bloomberg. He sees distinct advantages, too, in this new way of virtual M&As. Very effective, he thinks: “You can very quickly set up a meeting…instead of traveling halfway around the world.”
He’s far from the only one to see things in that light. Going forward, international business transactions won’t be the same. The pandemic taught us how to be more efficient in several fields, and we won’t forget.
Global M&A trends in 2021
In many ways, we’re looking at a brave new M&A world.
Granted, some of the post-pandemic trends setting the course for the short- and long-term future may not be entirely new. Things like the increase in all things technological, the rise of SPACs (Special Purpose Acquisition Companies) — these factors had been around. But the pandemic snowballed potential into reality so quickly that the business landscape has been transformed radically in just over a year.
Here’s what to expect for the future.
In-person meetings may not be exactly a thing of the past, but they may occur only a fraction as often as they once did. Online conferences and video calls have replaced the conference room and handshakes. The virtual data room vendor market is growing, and with good cause.
Even as the world population is vaccinated and travel springs back to normal, merger and acquisition processes are unlikely to revert to pre-pandemic standards.
The same is true of due diligence. Physical archives gave way to virtual data rooms (VDRs). At first a necessity, the use of virtual data rooms for due diligence is now recognized to bring clear advantages when used systematically, including much smoother research and more responsive communication. Expect the demand for virtual data room providers to continue as a definite trend.
With the level of uncertainty still significantly high, SPACs became a very popular way for companies to move forward without going through risky IPOs.
SPACs were a driving force behind the initial 2021 acquisition spike, with 274 new SPACs appearing in the US in the first quarter alone. As reported by PwC, they are also responsible for over 25% of megadeals closed in the first quarter of 2021.
With the market’s high liquidity level, Private Equity (PE) funds have also had their share in powering acquisitions throughout the year so far — 38%, totaling $512 billion, featured PEs, as opposed to 29% in the first half of 2019.
As for SPACS, although new regulations by the US Securities and Exchange Commission (SEC) have slowed down the creation of new ones in the second quarter, the number of SPACs still looking for companies to acquire is considerable, as you can see in the graph below.
SPACs 2019-2021. Source: Pwc.
This all but guarantees they will continue to push M&A activity through to 2022 and beyond.
A new rhythm for M&A
The current impetus towards acquisitions is unparalleled. It’s also likely to remain with us for some time. There are different reasons for that. Among them:
- high liquidity – PE funds and SPACs have benefitted from an uptick in investment that came largely from investors flush with cash and eager for good opportunities. This, in turn, has created a market with more acquisition power than there are assets to acquire
- the atmosphere of opportunity and competition – with the buzz of acquisitions, the fear of missing out on a once-in-a-lifetime market is even more real than the fear of overpaying
- the extra speed and efficiency afforded by the revolution in due diligence processes, as mentioned above
- time pressure for SPAC-powered acquisitions – because SPACs have a relatively short time frame—12-24 months for concluding acquisitions—they are motivated and don’t waste time with closing deals. With nearly 400 existing SPACs still looking for acquisition targets, the pressure isn’t going to abate anytime soon
- tax-related rush – the advantage in closing deals before the end of the fiscal year, under the light of Biden’s proposed tax hikes, has also been a pressing factor
Companies are looking to hedge their bets against future market swings, and one way to do that is through takeovers into different market areas. This is especially true of the technology sector.
Tech M&A volumes have more than tripled over a decade, but it’s no longer a simple question of tech companies merging. “[There are also] industrial companies now moving into tech, not just organically, but via M&A,” says Dirk Albersmeier, co-head of Global M&A at J.P. Morgan.
According to Bloomberg, the first quarter of 2021 had the highest volume of cross-border M&A activity on record, accounting for 41% of global M&A deals. The absolute increase in value compared to Q1 2020 is an astounding 78%, while in relative terms, the increase was also significant —41% of M&A came from cross-border deals, as opposed to 36% for the same period in 2020.
The cross-regional uptick was especially true of Europe, which, at a value of $169 billion in the first quarter, had the highest rates of cross-border deals. According to Albersmeier, one of the defining trends to look for in 2021 is the creation of “Pan-European Champions”. This is something that has long been talked about and looks to become a reality thanks to pandemic-driven M&A.
Despite the increase, relative and absolute, in cross-border deals, Reuters reports that most of the biggest deals of the second quarter in the US and China were domestic. This can be boiled down to rising tensions between the US and China — and also, to a notable extent between Europe and China.
In China, domestic transactions totaled $197 billion in the first six months of 2021 — eight times the amount of foreign-connected deals for the same period, according to Capital.com.¹¹
M&A industry trends
Although the increase in merger and acquisition deals is an all-around phenomenon, a few industry sectors stand out among the rest.
The only industry to grow in value year-over-year in 2020, technology is without a doubt one of the M&A market trends that came to stay. With $783 billion worth of deals in the first half of 2021, tech acquisitions account for a huge chunk of the M&A pie.
And it’s not all about consolidation. The movement from other industries to synergize with technology companies has been a major theme of M&A, too. According to Gartner, this is a trend set to continue deep into 2022.
Health and biopharma industries
Another area of major growth beginning in the second half of 2020 has been the health industry, which is now drawing much attention from institutional investors and has benefitted from significant PE fund interest. Globally, PwC reports 800 deals inked in Pharma and Life Sciences in Q2 2021—with an all-time high value of $168 billion.
Likewise, the amount of M&A transactions in Health Services has remained high, with over 500 new deals for each of the last three quarters. That is not to mention megadeals ($5B or more), eleven of which closed in H1 2021 to an approximate total of $128B.
Global M&A deal volumes in the Health and Pharma industries. Source: PwC
Global financial services were also up starting in the third quarter of 2020. Throughout the first half of the year, the main movement in this area has come from the Americas, with several megadeals in sectors like FinTech, leasing, banking, and insurance. Although deal volume and overall value decreased after an April high, activity has remained high well into 2021, with the US adding $1.1B in deals this June.
SPACs and private equity funds have been instrumental in this sector, according to PwC, four of the financial services megadeals announced so far this year were powered by SPACs, while PE funds represented 36% of aggregate deal volume.
The return of consumer activity in late 2020 and into 2021 has also created ample room for mergers and acquisitions in the industry. Globally, the number and value of M&A activity has been high for the past three quarters.
The Asia-Pacific region, in particular, saw a strong second quarter with $86B worth of deals — up from $30B in Q1. One of the key stories here is domestic consolidation in China, where consumer M&A deals are at a historic high.
The EMEA countries also had an increase in M&A quarter-over-quarter, while in the Americas, activity peaked in the first quarter, with $72B.
The pandemic impacted the world of M&A in more ways than can be described in a short article. Fortunately, after the initial collapse, the world wasn’t left reeling for long. Companies and dealmakers across all regions and sectors have shown remarkable antifragility — the ability to spring back from a challenge not just unhurt but stronger.
Going forward, the ability to see clearly and react quickly will continue to be the key driver of success in M&A. For those looking to reorient in the changing landscape, Anu Aiyengar has some solid advice beyond industry-specific trends: “Look for the logical, strategic targets. Be proactive. Focus on long-term creation”.
“That is the strategy that has withstood the test of time.”