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The year 2020 was unlike anything we’ve ever seen, fuelled by an enduring pandemic, massive economic uncertainty, a highly divisive U.S. presidential election and rising geopolitical tensions. While the world in 2021 remains a volatile place, pent up demand, ample funding, ultra-low interest rates and confidence returning to boardrooms indicate conditions are ripe for one of the biggest M&A years on record. Conditions are primed for a deal making surge in 2021, with our data suggesting a rally may have already begun. That said, the road to recovery will not be smooth. Here are five M&A trends financial executives need to know for the year ahead:
- An increasingly mercurial world
When President-elect Biden takes office, a straightforward shift from the isolationist stance of President Trump’s administration to more internationally expansive market conditions is unlikely. Things like the US rejoining the Paris Climate Accord, for example, will be relatively straightforward to initiate, but the underlying challenge of restructuring the economy and generating environmentally sustainable growth and green energy jobs remains daunting. And in some cases, such as re-joining the Trans-Pacific Partnership trade agreement, even just restoring the pre-Trump status quo will be difficult for various reasons. Instead, a geopolitical and macroeconomic environment dominated by tensions between the US and China is expected, with emerging economies largely aligning with China, and Europe caught in between. It remains to be seen how this will impact deal-making.
- COVID: A race against time
Governments are running out of cash, spending trillions to keep businesses, local governments and jobs afloat in the hope of a jump-start in 2021. Will economies warm up in time or will the fallout from the pandemic be worse this year, triggering a wave of insolvency that overwhelms the global economy, crushing any prospect of recovery in the short term? In the US, President-elect Biden has announced a record-breaking relief and stimulus package, but will even that be enough?
Some sectors have already reached their ‘tipping point’. Accelerated consolidation, restructuring and divestitures will dominate the travel, retail and real estate sectors. COVID-19 has also seen a quantum leap in the rate of digital adoption in financial services. In particular, the shift to remote working practices precipitated by the pandemic and calls to pursue a ‘green’ economic recovery are expected to drive M&A activity in the tech sector in 2021 and beyond.
- Remapping the geography of M&A
The global health and financial crisis led to a temporary pause in deal-making activity but many buyers used the time to question some of the old ways of doing things. Turbocharged by the pace of technology adoption during the pandemic, the criteria for deal making have substantially changed, with location slipping down the priority list for acquirers when targeting companies. When everything is virtual, does it matter where your operations are physically based? Instead of searching in Manhattan or London, a major bank looking to buy a fintech, for example, is increasingly likely to look beyond the borders of Europe and North America to new markets to access the right talent. The implications for the M&A market in 2021 and longer term will be significant.
- SPACs on the rise
The evolution of Special Purpose Acquisition Companies (SPACs) in the US has been dramatic, with 2020 a record-breaking year for the ‘blank cheque’ firms. Despite significant growth (350% increase year on year), they still represent only a small fraction of the overall M&A market (<1%). As deal timelines have slowed down as a result of the pandemic, with everything from employee background checks to regulatory approval taking longer than previously, SPACs offer one way to accelerate the time to a public listing (although the accounting and finance technicalities remain complex). Their strong track record, however, is intensifying pressure on regulators in other countries to relax rules and allow SPACs to operate in their markets. With questions over due diligence yet to be resolved, a new wave of SPACs seeking acquisition targets outside of North America in 2021 is more likely to be seen in markets less tightly-regulated than Europe. Time will tell how many of these ventures will be successful.
- Post-Brexit: What next for UK financial services?
Since the Brexit vote in 2016, M&A activity has continued in the UK and Europe against a backdrop of political and economic uncertainty. December’s last-minute deal ensures tariff-free trade will continue (at least in theory – in practice, logistical challenges and heightened concerns about the transmission of COVID have created the types of border delays that were supposedly going to be avoided). Even if obstacles to cross-border trade are gradually mitigated, how financial services will be affected remains unclear. This uncertainty will inevitably lead to some market volatility and disruption, creating M&A opportunities in 2021 for UK businesses and overseas buyers, as some sectors benefit from severing ties with the European Union, whilst others struggle.
The underlying fundamentals driving a surge in the volume and value of M&A deals have never been stronger and we expect 2021 to be a record year for deal-making. Following a rollercoaster 2020, firms have built resilience to withstand future shocks or crises, with an increasing number of transactions across all sectors expected to focus on diversification and capturing long sought-after capabilities.
That said, dealmakers should not assume a corner has been turned, with uncertainty set to remain. It will be as critical as ever for acquirers to pick their targets carefully for growth, before jumping into a deal if they are to give themselves the best chance of success.
Duncan Smithson is Senior director, M&A at Willis Towers Watson.