After the collapse in M&A dealmaking during the first half of 2020, the subsequent rebound from the middle of the year was probably stronger than many had expected. Indeed if you look at total transactions, 2020 is fifth in the transactions value table for the period since the global financial crisis of 2008/09.
Why the M&A market is active in 2021 – what’s driving opportunity?
- Disruption – Disruption fuels M&A activity and there’s certainly plenty of uncertainty and change being driven by Brexit, Coronavirus and the impact of the US elections. Not to mention the threat of tax changes, especially to capital taxes.
- Distress – 2020 was a difficult year for many businesses, and some will continue to struggle in 2021. Through ongoing balance sheet attrition, it’s likely that businesses with liquidity issues will become more distressed. This can only worsen as government support is retired in due course – making them targets for acquisition.
- Disposals of non-core assets – Covid has forced businesses large and small to review their strategic objectives. This, along with a desire to raise cash to de-gear, is likely to fuel a spate of non-core asset disposals leading to opportunity for third party buyers and for management teams to lead MBOs. And there is appetite from debt and equity funders to support such transactions.
- Strategy – strong companies will already be thinking about their “Covid-exit strategy”. Some will already have pivoted elements of their business in response to the crisis. Or made more use of technology. And they may be thinking about which bits of the business don’t fit their post-Covid strategy and where there are gaps that could be filled by acquisition. We’ll see more radical strategy changes than in “normal” times. Research by McKinsey & Company showed that companies that go beyond incremental changes and take an “all in approach to transformation” emerge stronger and importantly sustain that competitive advantage for the best part of a decade afterwards.
- Liquidity – There is plenty of liquidity in the market which makes 2021 very different from the period following the banking and financial crisis.- Public markets – The public markets have done remarkably well despite the trials of 2020, buoyed up by capital looking for returns, and there’s a queue of IPOs that may float in 2021. These include well known names like Doc Martens, Deliveroo, Trustpilot and Cambridge based cyber security business Darktrace- Private Equity – The Private Equity community comfortably weathered storm in 2020 and after a short period looking after portfolio companies quickly shifted focus back to new investment. PE funds have enough dry powder to blow up several Houses of Parliament and they’re actively investing it- Debt – A feature of 2020 was the clearing banks becoming entirely focussed on lending to existing customers, often using the various government schemes. It will be interesting to see how they react as such support is phased out – and what impact it will have on corporate failures. Despite that, expect some lending beyond the immediate customer base this year. But also continued strong activity from the various alternative lenders, and close on their heels lots of new entrants in the form of debt funds. Leverage and EBITDA multiples remain cautious and that’s likely to continue in 2021, along with more robust pricing and covenant structures
- Price expectations – Quite apart from a chronic shortage of liquidity in the market the other thing that stopped M&A dead in its tracks following the financial crash was the huge gap in price expectations between buyers and sellers of private companies. Cautious buyers with limited access to funds found it difficult to reach agreement with sellers still emotionally attached to pre-crash valuations. The narrowing of that gap as much as the return of funding got M&A going again. This time around buyers and sellers seem much more aligned, and the use of creative deal structures to help bridge any uncertainty is allowing deal doing to proceed relatively unimpeded.
Time for every business to think about M&A?
So 2021 is likely to be an active year for M&A. And it’s important that all businesses reflect on its relevance – even those which might not appreciate its relevance. If your business is struggling the right approach to M&A could yield a good outcome for the business and its people. Or on a more positive note if you have a good business that’s doing well, even if you’re not planning to make an acquisition, it’s quite likely an acquirer may come knocking.
