The foundation of deal-making in 2021 continues to focus on recalibrating strategy and accelerating the adoption of technology in the wake of COVID-19. As uncertainties have lifted, business leaders are confident in a strong economic recovery, as macroeconomic indicators, including positive GDP rates and high consumer price index (CPI) rates, promise growth—further whetting the appetite for mergers and acquisitions (M&A). In the PwC 24th Annual Global CEO Survey (2021), 76% of CEOs expect global economic growth to improve in the next 12 months. Largely undaunted by 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 digitise to reshape their businesses.
As a result, highly sought-after deals for technology and other innovative capabilities are likely to continue to command a premium. Interest rates are being carefully watched but are expected to remain low for the remainder of the year, providing ready access to cheap capital. Private equity (PE) fundraising has been brisk, and with more than US$1.9tn of dry powder, its buying power along with other private markets capital has never been higher. And while the creation of new special purpose acquisition companies, or SPACs, has paused, the sheer number of existing ones yet to find a target—by our count almost 400 of them—bring as much as a half trillion US dollars in combined cash and leverage expressly earmarked for future deal-making.
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.
A focus on competitive advantage
The global disruption triggered by COVID-19 led executives at many companies to review their portfolios during 2020 and into 2021 to reassess their strategies. These reviews have led to both strategic acquisitions and divestitures as companies redirect management resources and funds into those parts of the business with the highest growth potential and where they enjoy a distinctive competitive advantage. This has led to a trend of corporates using M&A to acquire capabilities they don’t have—often in technology—to enhance existing capabilities and reinforce that advantage.
Focusing on competitive advantages worked well for companies that were able to incorporate technology into their products and services during the pandemic. Leaders at companies that lacked these capabilities recognised the importance of acquiring them, leading to an increase in efforts to find the right target and execute a deal, whether through outright acquisition, joint venture or strategic alliance. Recent examples of such capability-led deals include Panasonic signing a US$7.1bn agreement in April 2021 to acquire Blue Yonder, Inc., a developer of software for managing enterprise supply chains—intended to strengthen Panasonic’s portfolio and accelerate the companies’ shared autonomous supply chain mission—and Walmart’s announcement in May 2021 of its planned acquisition of MeMD, a telehealth company—intended to further Walmart’s omnichannel health delivery strategy.
Opportunities for value creation and growth
Efficient operations and access to capital appear to have helped large corporates fare better than their smaller, less well-capitalised competitors. A number of recent mergers have been announced by companies seeking the advantages of size and scale. Such deals usually seek cost synergies to unlock value from the combination—and stock swaps can help address issues of relatively high valuations. Deal activity in the first half of 2021 included a record number of announced megadeals—those with a deal value over US$5bn; greater scale or transformational benefits were offered as the strategic rationale behind a number of these. These included, for example, the proposed US$15bn merger between Axiata and Telenor’s Malaysian mobile operations—intended to create a new market leader in Southeast Asia—and the approximately US$30bn proposed merger between Canadian National Railway and Kansas City Southern—which would create a freight-rail network linking the US, Mexico, and Canada. Given the advantages of strategic tie-ups, we see this trend continuing in the second half of 2021 and beyond.
Capability-led deals are usually tilted more towards revenue synergies with less opportunity for cost synergies. However, a recent PwC survey found that just 13% of survey respondents reported favourable results in capturing revenue synergies, which supports what dealmakers have known for some time—realising synergies, particularly on the revenue side, is challenging.
Record M&A activity and megadeals
The record levels of deal-making, both in terms of deal volumes and values, continued from late 2020 into the first six months of 2021. The volume of deals was roughly the same across Asia-Pacific, EMEA and the Americas, although deal value was more heavily weighted towards the Americas, a similar trend to 2020.
The first half of 2021 saw a continuation of the growth in deal size, contributing to record global deal values in excess of US$1tn per quarter over the past 12 months. Fresh capital inflows led by SPACs have been an important catalyst, as has been the increase in PE investment and corporate acquisitions—particularly those focused on technology assets. Technology, media and telecommunications companies accounted for a third of all megadeals in the first half of 2021. However, this number increases to over a half when companies with a technology-orientated business model—regardless of their sector—are considered.
SPACs catapulted the megadeals announced during the first half of 2021 to record levels. Over a quarter of the announced megadeals had a SPAC buyer and an outsized proportion of those (almost 90%) involved technology. This may fuel the collision we anticipate between SPACs and the rest of the market, and force buyers to rethink their strategies to win in the current environment. In addition to SPACs, PE funds have been active investors, and the share of deals with PE involvement increased from 27% in early 2019 to 38% in the first half of 2021. PE deal values have risen as the PE industry’s appetite for larger and more complex deals has increased.
By Brian Levy, Global Deals Industries Leader, Partner, PwC
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