M&A Strategy Challenges and 2021 Deal Drivers

INTRODUCTION

The quagmire of the 2020 global health pandemic, social unrest and politically charged events created a perfect storm of uncertainty that touched nearly every organization across the globe. As consumption dwindled in some sectors, new growth emerged in others. M&A activity dipped at the beginning of the pandemic due to widespread uncertainty, but soon after, it soared once again, as organizations went hunting for bargains to support new market strategies and quick growth opportunities.

According to PwC 24th Annual Global CEO Survey 2021 almost 76% CEOs expect global economic growth to improve in the next 12 months. Largely undaunted by the macroeconomic concerns around inflation and geopolitical factors such as tax policy, protectionism, and increased regulatory scrutiny, they appear to have a clearer vision of where value creation opportunities exist in current portfolios – and a sharper focus on M&A strategies to accelerate growth, gain scale, and digitize to reshape their businesses.

Now almost two-thirds (63%) of companies plan to increase investment in technology and digital capabilities. Just under two-thirds (57%) will boost investment in customer engagement. And many are opting to transform through transactions, with nearly half of respondents (49%) planning acquisitions in the next 12 months – and the majority of would-be dealmakers (65%) are looking for assets internationally rather than domestically.

They are seeking to acquire innovative startups and tech-enabled competitors to get even closer to their customers and enhance the digital channels that have proved vital for leading companies in the lockdown recession. Private Equity (PE) fundraising has been brisk, and with more than US$1.9tn of dry powder, its buying power along with other private capital markets has never been higher.

This abundance of capital is likely to shape the M&A landscape well into 2022 – and may put corporate, PE and SPAC buyers on a collision course as they compete to acquire technology, capabilities, and other sources of advantage. The competitiveness of the market reflects a growing understanding among business leaders that creating value requires more than cost-cutting – and they are willing to pay more for revenue synergies that fuel long-term growth. Yet, as prices rise, along with an ever-increasing pressure to get deals over the line, they’ll need to be mindful of the risk of overpaying.

In addition Special Acquisition Companies(SPACs) shell companies created for the sole purpose of taking a private company public – may continue to be a significant presence among bidders in the 2021 M&A market, as their finite window to identify transaction targets creates urgency and public market valuations exceed that of private companies in many sectors.

 In 2020, 248 new SPACs raised $82 billion in the U.S. – more than five times 2019’s total volume.5 As of early February 2021, approximately 300 SPACs remain in search of acquisition targets. SPACs are fulfilling a unique role in M&A and capital markets today. In these markets, SPACs can represent a compelling alternative to a traditional IPO or to a private sale transaction.