Are you ready for the seventh great M&A wave?
M&A isn’t just heating up – it’s on fire.
Strong out the gateAccording to our partner Mergermarket, global activity in the first quarter of 2021 reached USD $1.15trn in transactions, making it the ‘most active annual opening’ on record. Even with COVID challenges ongoing, cross-border deals contributed significantly, hitting another record with USD $516.6bn in the quarter.
The appetite for deals is strong, and no industry has been excepted from this spree. Companies are revisiting acquisition strategies and eyeing their less fortunate competitors who couldn’t weather the storm. Those who made it out the other side with healthy balance sheets are ready to take advantage of the booming market.
What’s contributing to the reboundA review of post-pandemic booms can tell us some of the historical reasons why economies bounce back after a downfall. For this post-COVID period, however, we can look at the direct influences on the surge in M&A activity that are ongoing today. Combined, these influences are creating the ideal climate for growth, of which M&A will play a critical role.
Government stimulus: Governments focused solely on pandemic recovery and related issues this past year, including those pertaining to job security, social and economic infrastructure, and broken or depleted supply chains. Policy changes around the world are being implemented daily in response to the crisis, as can be viewed on EY’s COVID-19 Stimulus Tracker.
According to the Australian Financial Review, this stimulus has been significantly more effective than in the period following the GFC as government debt servicing costs are a fraction of what they used to be.
Vaccine rollout: For many, the production and rollout of the vaccine has been a key factor in alleviating uncertainty – particularly political uncertainty around cross-border deals - and indicating that there’s a light at the end of the proverbial tunnel.
Cheap capital: Companies are ‘swimming in globally available debt’ and have early access to plentiful capital with near-zero interest rates (which aren’t due to increase for the next three years, according to the Reserve Bank of Australia). Combine this with the substantial dry powder levels of private capital players including Private Equity and super funds, and you’ve got the perfect ingredients for a dealmaking storm.
It is worth noting that this was also the case last year; however, we can expect that COVID uncertainties delayed a number of the transactions we’re now seeing come through.
Shifting strategies: Bankers are referring to it as ‘the great post-COVID-19 strategy rethink’, whereby boards and management teams have a new lens of focus when it comes to aligning their priorities and future strategies. For many, this involves the divestment or diversification of assets and a growing concern with ESG. The enforced lockdowns provided time for reflection.
The SPAC surge: The popularity of special purpose acquisition companies (SPACs) has dominated the headlines over the past year, particularly in the US. These ‘shell’ companies list publicly ahead of merging with a target company, and they are starting to widen their search to Australia and Europe.
More than US $97b was raised by 304 SPACs globally in the first quarter of 2021, and M&A tied to SPACs has also spiked, with 99 deals globally worth USD 219.5bn in the same period - more than all of 2020 (Mergermarket).
How to capitalize on the boomBankers and lawyers are already in the thick of it, with M&A deals coming in strong from the beginning of the year. But with more activity comes fierce competition, and advisors are ‘competing for assignments and hefty fees’.
For companies, early preparation and readiness to act on opportunities is crucial, whether they are acquiring, selling, or divesting assets as part of an adjusted strategy.
In such a climate, the benefits of a programmatic M&A approach are multiplied tenfold for acquirers; deals should not be treated as one-off events, but should be adopted as a consistent play for deal volume (over deal value). Research from McKinsey shows that multiple smaller deals - executed systematically - generate more long-term value than infrequent big-ticket transactions. And there’s no better time to take advantage of a booming market.
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