According to Bain &
Company’s Global M&A Report 2021, the pandemic has hastened
trends in dealmaking that were previously years away, including rapid
digitalization of the dealmaking process, increased localization and
the growing need for new capabilities
New
York – Feb. 16, 2021 – 2020
was a volatile year for M&A, with an almost complete halt in deal
activity in the early months of the Covid-19 crisis and a rebound in
the second half of the year, when deal value rose by more than 30% in
the third and fourth quarters. Bain & Company’s new survey of
nearly 300 M&A practitioners shows that appetite for M&A
remains robust, with about half of respondents expecting higher M&A
activity in their industries in 2021. The survey also shows that M&A
will continue to be a key strategic pillar for business, with
practitioners expecting M&A to contribute to 45% of their growth
over the next three years, compared to about 30% over the past three
years. These are among the findings of Bain & Company’s
Global
M&A Report 2021.
“2021
promises to be a dynamic year for M&A,” said Andrei
Vorobyov,
a partner at Bain & Company and a leader of the firm’s Mergers
& Acquisitions practice.
“Executives expect an uptick in M&A activity and that M&A
will become even more important for achieving growth. To compete in
this increasingly disruptive environment, M&A practitioners need
to rethink their M&A strategy and roadmap; broaden their M&A
options to include corporate venture capital, partnerships and
minority stakes; and further digitalize their M&A process.”
The
surprising increase in deal multiples
In
addition to an unexpected rebound, 2020 brought a number of surprises
to M&A practitioners, including strong deal
valuations across many industries. With
the pandemic taking its toll on the economy, it was natural to assume
deal valuations would weaken leading to distressed M&A. Indeed,
that is what transpired following the global financial crisis, when
deal multiples dropped by about 30% over two years.
But
in the unpredictable year of 2020, the opposite happened. Globally,
median enterprise value to earnings before interest, taxes,
depreciation, and amortization deal multiples increased to 14 times
from 13 times in 2019, underpinned by fast-growing industries, such
as technology, telecommunications, digital media and pharmaceuticals.
Unprecedented government stimulus, combined with continuing low
interest rates, a spike in household savings rates, record PE dry
powder and accessible debt capital markets, has contributed to
sustained asset prices.
A
growing urgency to divest
While
Covid-19 placed unprecedented demands on management bandwidth,
divestiture activity went to the back burner. Divestiture volume was
down 15% in 2020, and value dropped by 21%. However, the crisis has
added an urgency to divest as companies need to divert their scarce
resources to the best opportunities amid increasing industry
disruption. Roughly 40% of the practitioners Bain surveyed expect a
rise in divestitures over the next 12 months, with the industries
hardest hit during the pandemic, such as retail, energy and
hospitality, likely to see the highest level of divestiture activity.
Bain’s
research indicates willing buy-side demand for divested assets too.
About 62% of surveyed M&A practitioners expect more interest in
acquiring carved-out assets in their industries over the next 12
months. Meanwhile, private equity (PE) interest in carved-out assets
is expected to remain high in the year ahead, with general partners
under pressure to continue to put dry powder to use. Across
industries, 30% of respondents anticipate PE to increase its interest
in buying divested assets, with the biggest anticipated rise in
advanced manufacturing.
A
continuous appetite for growth and new capability assets
A
few years ago, Bain identified an increase in the share of scope
deals aimed at helping companies expand into fast-growing markets or
gain new, mostly tech and digital, capabilities. This trend continued
in 2020, with scope deals further increasing volume share to 56% of
all deals more than $1 billion, compared with 41% in 2015.
Technology,
consumer products and healthcare stand out with the highest share of
scope deals. The need for new critical capabilities was at the heart
of many recent scope deals. For example, consumers’ growing demand
for direct delivery drove Target’s acquisition of Deliv, Nestlé’s
acquisition of Freshly and Ahold Delhaize’s acquisition of
FreshDirect.
Scale
M&A continues to be relevant as well, especially in industries
that are watching the pandemic hasten the disruption of their
business models. Traditional media and retail will experience more
consolidation as scale becomes increasingly necessary to compete with
and outinvest digital competitors.
In
banking and telecommunications, consolidation is also being
encouraged by regulator support. In banking, the US and Europe are
already witnessing the start of domestic consolidation, with such
deals as PNC and BBVA in the US, Bankia and Caixa in Spain, and
Intesa Sanpaolo and UBI in Italy.
Increasingly
local supply chains
Covid-19
accelerated a number of M&A trends that previously felt years
away. Among
them, the
decline in cross-regional M&A in favor of local or regional
deals. The rising scrutiny on cross-border deals and ongoing US-China
trade tensions have already been slowing down cross-regional trade
for a few years. This trend is decisively accelerated by supply chain
concerns exposed by the Covid-19 crisis. About 60% of Bain’s survey
respondents said supply chain localization will be a significant
factor in evaluating deals going forward.
As
an indication of this localization, the number of Asian outbound
deals into the Americas and Europe fell by 29% year over year in
2020. With overall deal value down only 2.5%, Greater China acquirers
directed 93% of their deal spending toward domestic companies, with
only around 5% going to deals in the Americas and Europe, the Middle
East and Africa. This represents a sharp drop from around 11% in 2019
and roughly 25% in 2016, the peak of Chinese outbound M&A.
Virtual
diligences and integrations
In
addition to becoming increasingly local, deals rapidly moved online
in 2020. Corporate M&A and PE teams have found themselves quickly
adapting to the world of virtual due diligence, deal closing and
integration. Yet, about 70% of M&A practitioners Bain surveyed
said that diligence in 2020 was challenging.
2020
will also be remembered as the year ESG assumed a prominent place
among M&A criteria, requiring the extension of target screening,
the development of new diligence capabilities and the use of new data
sources.
Industry
perspectives
More
so than in the past, the external environment in each particular
industry is setting the boundaries for how much M&A companies can
do. Technology, media and telecommunications all saw strong market
capitalization increases last year, while energy and financial
services saw the biggest declines. Below are some of the most notable
industry-specific trends Bain is watching.
Consumer
products: It would be natural to
blame the pandemic for the drop in consumer products deal value last
year, but it represents a continuation of trends that have been
playing out over the past three to five years. Bain’s research
shows the industry may be due for an uptick in deals—45% of
surveyed consumer products M&A practitioners expect deals to
increase over the next 12 months. The most profound change in
consumer products M&A is in deal mix.
Scope
and capability deals now make up 60% of deals greater than $1
billion. Deal activity for insurgent brands—those that
significantly outpace category growth while simultaneously reaching
minimum scale—has grown twofold to threefold since 2015. These
trends point to a more fundamental change in M&A strategy as the
consumer products industry reacts to low growth and historic
disruption in consumer needs, channel shifts and competition.
Retail:
The Covid-19 pandemic hastened
the shift to e-commerce, increasing the importance of M&A in
the
retail industry. The retail M&A practitioners Bain surveyed
expect M&A to contribute almost 60% to top-line growth over the
next three years compared to around 35% over the past three years,
one of the highest jumps among all industries surveyed. Activity will
intensify for both scale and scope deals.
Markets
are looking for scale, growth and digital performance. Nowhere is
this seen more clearly than in the grocery sector. Increasingly,
grocers are taking creative new approaches to deals. Some are buying
or partnering to integrate supply chains, while others are partnering
to access new capabilities and technology and to accelerate growth of
new channels.
Technology:
Technology M&A roared back
from an almost standstill in the second quarter of 2020 to hit
record activity in deal volumes
and value in the second half of the year.
Tech M&A continued to trend
toward more growth- and capability-oriented scope deals,
representing 81% of industry
deals in 2020, far more than other industries. Most significant is
the rising interest of nontechnology investors in the tech space,
which now account for nearly three-quarters of deals in the
technology sector, up from about 60% a decade ago.
Media:
In
media, Bain expects a flurry of new deals over the next two to three
years, with the majority of growth in media coming from video
streaming. Bain’s new research shows that there will only be a few
winners once the dust settles in this land grab moment. Our data
shows that streaming grew quickly in the first half of 2020, but that
consumer demand caps at three to four subscriptions. The report also
digs into the unique nuances of integrating media companies,
especially virtually, given the criticality of creative talent in the
industry.
Telecommunications:
Following a steep drop the
previous year, telecommunications deal value grew by about 50% in
2020. The industry also witnessed a changing deal mix. Despite fears
that further industry consolidation would be quashed by regulators,
scale M&A rebounded. Meanwhile, infrastructure M&A, a type of
deal that’s unique to telecommunications, continued apace as
companies sought to monetize infrastructure assets that command three
to four times the valuation multiples of the integrated telecom
operators themselves.
Banking:
The banking industry is primed
for an upswing in M&A activity. Valuations are dropping in
banking, with average price-to-book value decreasing by 35% globally
in 2020. Even after gradual consolidation, banking remains a
fragmented industry across all key markets, with the top five banks
accounting for only 30% of total deposits in the US, 40% in the UK,
and 38% in China. Unlike many other industries, regulators are
creating conditions and frameworks that favor consolidation. For
example, the European Central Bank recently published guidelines for
consolidation in the banking sector.
Finally,
there is the impact of Covid-19. Despite government interventions,
the economic fallout has caused banks that entered the pandemic in a
weaker position than their competitors to weaken even further,
widening the rift between the less healthy banks and those that have
remained relatively robust despite substantial losses and lower
capital ratios. The rift will create opportunities for stronger
players to acquire and for weaker players with capital ratio gaps to
look into their portfolios for potential businesses to divest.
Insurance:
Insurers are streamlining their
businesses to redefine themselves with a narrower focus and stronger
core. Divesting of noncore businesses represented about 70% of
insurance deals valued at more than $1 billion over the past five
years. Buyers are taking advantage of these divestitures to
strengthen their market position and step into near adjacencies. As
there is still considerable uncertainty about how emerging
capabilities will mature, many established insurers have chosen to
access new capabilities with investments and partnerships. While
private technology investments by incumbent insurers slowed in 2020
from their recent pace, Bain expects a rebound in 2021 as insurers
build for the future. The continued market enthusiasm for insurtechs
suggests that there is no shortage of innovative ideas and
capabilities that could benefit insurers.
