DAX/MDAX global M&A survey
Outlook: M&A drivers and dampeners
The pandemic is still affecting economies across the world. But the acute uncertainty found in many boardrooms last year has since been counterbalanced by a degree of (conditional) confidence.
Much of this is driven by the accelerating vaccination programs, massive government financial support packages, and the continued availability of liquidity. At the same time, a year of uncertainty has also created substantial pent-up demand for acquisitions (and some significant war chests among corporates in many industries). As a result, we expect 2021 to continue the bounce in deal-making activity that we saw at the end of 2020 (PDF), with the first three months of the year confirming this prognosis.
We believe that the following factors will continue to drive M&A in 2021 and beyond.
Lockdowns across much of the world saw established digital players flourish. But many companies that relied on physical interactions or had business models not fully aligned with the digital era have suffered, prompting them to accelerate their digital transformation efforts.
As a result, we expect an ongoing interest in tech, digital and related target companies, including in enterprise software, artificial intelligence, robotics, and infrastructure such as 5G. This includes investment through an ever-increasing number of dedicated venture-capital vehicles set up by major corporates.
The speed and success of these companies’ digital transformation will likely determine their resilience and starting position in upcoming waves of consolidation.
More predictable international politics
Following the uncertainty surrounding the 2020 presidential election, the new US government is signalling stability and predictability. And with the long-running Brexit negotiations closed and cemented in the Trade and Cooperation Agreement, UK-EU relations – though still unpredictable in some regards – should begin to settle down.
Resilient economic environment
Governmental aid packages (including the US federal government’s eye-watering $1.9tn package announced in March) and low interest rates have kept financial markets buoyant and maintained the availability of cheap debt financing to strategic and financial investors.
In addition, sponsors still have plenty of dry powder to deploy, and the emergence of listed special-purpose acquisition companies (SPACs) on both sides of the Atlantic has added a new dimension to the capital markets and an additional exit route for founder-led and venture capital-backed businesses. There are currently more than 400 SPACs looking for acquisition targets, with US-based SPACs alone being involved in more than 17 percent of all global M&A deals by value in the first quarter of 2021.
CEOs – particularly of large corporates – continue to be under pressure to divest non-core assets in order to take advantage of record high valuations and enable inorganic growth in other areas.
In particular, shareholders, boards and also regulators will continue to place an ever-increasing emphasis on ESG and sustainability management, with these priorities becoming decisive factors for M&A strategies, even more than they are already.
A bounce in deal-making in 2021 could still be tempered by the following factors.
The last few years have seen growing trade conflict between the US and China, and (particularly since the onset of the pandemic) protectionist tendencies in many other countries around the world.
Our analysis of the deal data suggests that these trends have not (yet) had a major impact on M&A activity, at least in terms of cross-border deals, which have seen no notable decrease. But German companies looking at assets in strategically critical industries must prepare for delays – or even more fundamental challenges – before successfully completing acquisitions abroad.
More merger control(lers)
The UK is the second most popular destination for M&A behind the US for both DAX and MDAX acquirers. But with the UK’s competition authority now reviewing mergers separately from the European Commission, M&A with a UK nexus could get trickier and more transactions will face reviews in both the UK and the EU.
More broadly, Joe Biden’s election victory and a renewed focus on competition in the tech space both at the European Commission and in the UK mean antitrust reviews of digital and tech deals in major markets are expected to ramp up significantly in 2021.
Foreign investment interventions
While we have witnessed a tightening of foreign investment regimes across the globe for some time now, the pandemic has added further fuel to governments’ drive to scrutinize cross-border transactions.
Interventions by foreign investment regulators hit an all-time high in 2020 and Europe in particular has become a more complex environment for foreign investors, with European governments introducing a variety of new measures and expanding their lists of relevant sectors during the pandemic. In some countries, even intra-European deals now trigger a filing and review requirement.
The rapidly evolving regulatory landscape creates increased unpredictability, which in turn requires very targeted due diligence and precise risk allocation mechanics in the transaction documentation.
Cross-border acquisitions by German companies could well face more hurdles than in the past. This is due to heightened antitrust scrutiny regardless of target size or competitiveness in the market concerned, new regulations aimed at tech companies, and issues such as interoperability, data access and self-preferencing, which can go to the core of their business models. There’s also the growing likelihood of foreign investment reviews. More than ever before, German acquirers are faced with increasingly complex and multifaceted requirements and regulatory approvals around the world, which they need to comply with in order for their M&A ambitions to succeed.