After going into deep freeze in March, the merger and acquisition markets have been heating up, with little sign of cooling down again soon. 

MA

“CEO confidence is what really drives M&A [merger and acquisition] activity,” remarks Steve Baronoff, chair of global M&A at Bank of America. It is, therefore, of little surprise that when pandemic uncertainty really took hold in March, and lockdown measures followed, M&A activity effectively ground to a halt.

In a scenario where industries across the board saw their usual operations up-ended (even if it was to be swamped with demand in some cases), a moment of taking stock was needed. Dirk Albersmeier, global co-head of M&A at JPMorgan, comments: “In the midst of the pandemic, companies were clearly focusing on their business, their people and cash flow. A couple of deals that were very advanced could still be completed, but everything else got put on hold. At that time, it was very difficult to start any new discussions.”

However, either by necessity for survival or with a view to strategic opportunity, as businesses adapted to a new economic reality, interest in M&A recovered. Mr Albersmeier says: “What has been interesting in the pandemic is how quickly people have come back to M&A. Management teams who had businesses that were not materially impacted by Covid and benefited from strong balance sheets started quite quickly to ask themselves, where are the opportunities?”

Ravi Gupta, partner and global co-head of industrials for global advisory at Rothschild & Co, echoes this view, saying: “Since July, we have observed a shift in sentiment among business leaders. Across many sectors, excluding those at the sharp end of the crisis, the financial effects have been less extreme than were feared. It is not a coincidence, therefore, that our M&A pipeline has been building over the past few months. This has been helped by the availability of relatively cheap debt and on the heels of a market rally, which has led to increased sentiment back towards inorganic growth strategies.”

Changing fortunes 

It has certainly been a sharp turnaround. The second quarter of 2020 was one of the worst on record for global M&A, with just $372.2bn worth of deals being done — the lowest total since the third quarter of 2009, according to data from Mergermarket. Contrast that with three months later, and the value of deals done in the third quarter reached $891.4bn.

What has been notable for many market participants is the extent to which activity has broadened. “There’s been a pretty strong recovery post-[northern hemisphere] summer, driven by various drivers and sectors. It’s been quite encouraging, much better than many of us would have thought earlier in the year,” says Berthold Fuerst, co-head of investment banking coverage and advisory for Europe, the Middle East and Africa (EMEA) at Deutsche Bank.

Dirk Albersmeier Photo

Dirk Albersmeier, JPMorgan

While technology, a so-called ‘Covid winner’ sector, saw deals worth $385bn during the first nine months of 2020 — a 20-year high — there has also been significant activity in perhaps less expected areas, such as oil and gas, according to Refinitiv data. Mr Baronoff says: “If you look at the activity through the third quarter, it was Covid-resistant sectors. So you see a lot of technology and healthcare deals. You also saw activity in energy and shale, where you’ve had a shock to the system and those companies needed to combine to get stronger. Lately it spread to less-Covid resistant sectors; we’ve seen quite a lot of food retail deals. So I think it started with the Covid-resistant sectors and then it’s been expanding into a broader range of sectors.”

Alison Harding-Jones, head of M&A for EMEA at Citi, says: “I think everyone, looking across sectors, is repositioning, whether that is because they are in a sector which is hard hit and it is necessity driven, or because they are in a higher growth sector and they see this as a moment to take share from a position of strength.”

The size of deals is also an interesting dynamic, and depending on how one defines ‘megadeals’ it is possible see this as period of brisk activity or a dip for the biggest deals. According to Refinitiv data, during the first nine months of 2020 there were $653.9bn worth of deals valued at $10bn or more, a decline of 33% compared to 2019. However, there was a 23% increase in deals valued at between $5bn and $10bn, totalling $307.9bn. Either way, it is clear that these ‘lower mega’ transactions of more than $5bn have been responsible for boosting the market. Whereas the mid-market of deals valued at $500m to $1bn and, to a lesser extent, deals valued at $1bn to 5bn have taken a dip.

Beranger Guille, editor for EMEA at Mergermarket, has a hypothesis about why that would be the case. “The pandemic has affected smaller and mid-market deals a bit more,” he says, “because, as part of the M&A process for these types of deals, to be able to go on site and see the physical factory, or whatever else type of business that you’re acquiring, is perhaps more critical than with multi-billion dollar deals, where you can’t ‘visit’ what you will be acquiring in the same way.”

Even outside of M&A transactions involving site visits, the inability of bankers and investors to travel or have face-to-face meetings for much of the year certainly has posed a barrier in an area of banking where the softer side of doing business is usually very important. This is particularly true for transactions between parties who do not have a prior relationship.  

But, along with society in general, bankers say they have adapted to the new ways of needing to do business, even where site visits are involved. Philipp Beck, head of M&A for EMEA at UBS, says: “[While] the ‘new normal’ is different, the direct human interaction cannot be replicated via modern technologies. But we found tools and features which allow us to run management presentations virtually, conduct virtual site visits, live streams out of facilities, drone footage of sites. So digitisation has definitely reached M&A.”

Mr Gupta echoes this sentiment, saying: “We have all had to be more creative. For instance, in the industrials sector, buyers like visiting sites and ‘kicking the tyres’, so we have had to find ways of conducting virtual site visits. We have managed to do this effectively through video tours using drones which are overlaid with management commentary.” 

These novel solutions may have smoothed over certain challenges, but some bankers argue that for more complex deals, such as cross-border transactions, not being able to get in the same room to meet or do due diligence could be a material difficulty. Mr Albersmeier comments: “It’s really difficult to make big bold moves and negotiate complex transactions purely over virtual interactions. For domestic deals that offer clear cost synergies and where the key people know each other, it’s usually less of an issue.”

Despite the difficulties, some notable cross-border business has been done in this period, for instance German company, Siemens Healthineers’s acquisition of US firm, Varian Medical Systems for $16.4bn. Mr Beck says: “We advised on Siemens Healthineers/Varian, which was a transatlantic transaction executed de facto virtually during the pandemic. This and other, similar examples have proven that it is possible to do things remotely.” In that particular deal’s favour is perhaps that the companies knew each other already, having worked together on a partnership since 2012 to improve cancer therapies.

Challenging circumstances

Overall, cross-border deal volumes did decline this year, with a 36% fall in the first nine months of 2020 compared to 2019, according to Mergermarket. This is, perhaps, not especially surprising — cross-border M&A is often challenging at the best of times, so the benchmark for going ahead with such a transaction in the current climate is likely to be relatively high. Philippe Le Bourgeois, partner and global chief operating officer for global advisory at Rothschild & Co, says: “Cross-border deals are always more complex to deliver as it’s a leap into the uncertain, and therefore needs a lot of process and due diligence to be successful. This complexity is intensified in the current environment and, therefore, it must be a strategic transaction rather than opportunistic.”

The wider geopolitical climate, following several years of US-China trade tensions, increasing international scepticism in relation to Chinese ownership more broadly, as well as growing sensitivities around supply chains and key industries in the wake of Covid-19 disruption, also create a more challenging backdrop for international deals.

Driven by trade tensions, Chinese companies have continued selling US assets back to US incumbents

Samson Lo, UBS

However, Samson Lo, head of M&A for Asia at UBS, suggests, perhaps a little counterintuitively, that trade tension with the US bodes well for Chinese-led M&A volumes, at least in the short term. He says: “Driven by trade tensions, Chinese companies have continued selling US assets back to US incumbents.” ByteDance’s forced sale of TikTok to a US buyer is perhaps the most notable example, but it is a much wider phenomenon. A recent report from economic research organisation, Rhodium Group, found that total announced Chinese divestitures of assets in the US amounted to $76bn between 2000 and September 2020, with the vast majority of that total occurring since 2018.

Special acquisitions

Another significant driver of M&A within the US continues to be a robust market for special purpose acquisition companies (SPACs). In August, The Banker covered how a surge in interest for so-called “blank cheque companies” within the US equity capital markets was providing a boost to initial public offering (IPO) markets. These companies, often associated with a high-profile sponsor, raise money via an IPO with the mandate to acquire a company with that capital, typically within a certain industry. Recent prominent examples include venture capitalist, Chamath Palihapitiya, who raised $2.1bn via three different SPACs in October (his first SPAC acquired Virgin Galactic in October 2019), and tech entrepreneurs Mark Pincus and Reid Hoffman (a co-founder of LinkedIn), who raised $600m for their SPAC in September.

According to website SPACInsider, as of mid-November, 178 SPACs had IPO-ed in 2020, raising $64.8bn, with a further 61 seeking to IPO, compared to 59 raising $13.6bn during the whole of 2019. As of mid-November there were 184 listed SPACs seeking target companies to acquire. A SPAC must make an acquisition within a specified window from raising cash, typically two years, otherwise the company must be dissolved and funds returned to investors. Mr Albersmeier comments: “The biggest risk is that there will be an imbalance between supply and demand and that the large number of SPACS that raised capital in 2020 will ultimately not find enough high-quality companies to acquire.”

The biggest risk is that there will be an imbalance between supply and demand 

Dirk Albersmeier, JP Morgan

If US markets are becoming busy, there is a sense that SPACs could start to drive M&A activity elsewhere. For instance, a number of prominent Asian-oriented SPACs have listed on New York-based stock exchanges this year, such as Bridgetown Holdings (fronted by Paypal founder, Peter Thiel, and Hong Kong businessman, Richard Li, and Citic Capital’s SPAC). Mr Lo says: “While SPACs remain a primarily US phenomenon there is growing interest in the idea of Asian SPACs,” although the market remains relatively untested.

In Europe, where only a handful of SPACs have been listed on the region’s exchanges in recent years, it has been reported that exchanges, such as the London Stock Exchange, have been exploring options for how to entice more SPACs to list. Under the UK regime in particular, SPACs can be riskier for investors who, unlike in the US, typically are not given the opportunity to vote on proposed acquisitions, and, owing to UK regulation, cannot redeem their funds as easily. The additional risk for investors can make for a more challenging fundraising environment.

In contrast, back in their primary market of the US where business is booming, SPACs are increasingly regarded as another option within the mainstream of the capital raising and M&A ecosystem. Mr Baronoff says: “The SPAC is here to stay. Whether the activity level will stay as high as it has been lately, is more of an open question. But either way, it’s going to be a much bigger part of the M&A landscape than it has been historically.”

Mark Shafir, co-head of global M&A at Citi, is optimistic about markets’ ability to adapt to the growth of SPACs. “I’m not concerned that we’re going to run out of targets, because people could have said that about sponsor funds,” he says. “The answer is the market has proven to be capable of accommodating that, so I’m less concerned about that. We’re also being very selective on who we agree to raise money for.”

Although the amount of SPAC activity taking place may be eye-catching, it is just one aspect of a market that is generally flush with cash. Capital markets are providing ready access to cheap funding and private equity firms have record levels of dry powder available for investment. Mr Fuerst says that “on both the buy and sell side, there is so much [private equity] firepower to do deals”. According to Refinitiv data, private equity-backed buyouts accounted for 15% of M&A activity during the first nine months of 2020, the highest level since 2007. Mr Gupta comments that there is strong interest for “quality assets from sponsors whose sense is that acquiring businesses in the current market will result in a value-creating vintage not dissimilar to what they experienced in 2008/9”.

With interest rates likely to remain low, and broader interventions from central banks, conditions look likely to remain relatively benign. Combine this with early November’s announcement from pharmaceutical company Pfizer about the efficacy of its Covid-19 vaccine, candidate and market confidence looks likely to only continue increasing, as a path to something approaching normality becomes more visible.

Speaking in mid-November, Eamon Brabazon, co-head of M&A, EMEA at Bank of America, says: “It’s early days in assessing the impact on the M&A market of any Covid vaccine. Intuitively though, any return to something approaching normality will provide a boon in 2021. This, underpinned with the ongoing search for growth, subdued funding costs and a lower volatility environment, are all positive tailwinds that augur well for M&A in 2021.”

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter