The tailwinds set to drive deal-making in the year ahead
With vaccines starting to receive regulatory approvals, inexpensive financing still readily available, new investment classes like SPACs providing even more M&A fuel and equity valuations sky-high, conditions are primed for a deal-making surge in 2021.
Indeed, the data suggests a rally may already have begun, with 2020’s six biggest acquisitions all announced since the start of September.
Both the Dow Jones and the S&P 500 ended the year close to record highs, driven by soaring technology and healthcare stocks and the resolution of the US election. Corporates and financial sponsors were buoyed by the likely division of the US government, which will limit the ability of the progressive wing of the Democratic party to introduce major policy changes, including significant tax rises.
That said, the road to recovery in the months ahead will not be smooth. No one is underestimating the challenge of inoculating billions of people, while the new US administration will re-establish links with America’s traditional allies in ways that could have a significant impact on deals.
The events of 2020 will polarise the corporate world, creating winners and losers among the businesses that remain. CEOs are under pressure to ensure they fall on the right side of the ledger, with deals seen as an effective route to success. Investors, too, regard M&A as an efficient way to boost share multiples, not least active managers who are under pressure to drive growth from their portfolios as money shifts to passive funds.
A year of relative stasis has created huge pent-up demand for acquisitions (and some significant war chests among corporates in many industries), and we expect this to lead to more hostile bids by companies looking to emerge from the crisis as consolidators. This is likely to drive a run of pre-emptive divestitures (the so-called ‘fix it first’ technique), with antitrust enforcers keen to tackle concentrations of power and protect consumers battered by the economic crisis. The volatile macro outlook is creating further challenges, with earn-outs and contingent value rights increasingly being used to bridge gaps between buyers and sellers amid divergent forecasts for the target’s performance. Likewise, parties whose transactions are taking longer to close thanks to the increasingly complex antitrust and foreign investment landscape are focusing on the interim operating covenants and regulatory risk allocation mechanisms in their deal agreements as they look to manage their exposure.
For more insights on recovery era M&A, read our 2021 board memo here.
Change at the top set to impact acquisitions
While many CEOs are aiming for a fast start to 2021, for others the race is done. Speaking to deal-makers across the US, it’s clear that having navigated their businesses through COVID-19, rancorous elections and the outpouring of emotion that has accompanied the ongoing fight for racial justice, a number of chief executives are set to step down in the year ahead.
Handing the challenge of attacking the recovery era to the next generation could have an impact on M&A, with research by McKinsey revealing that more than half of new CEOs launch some form of transaction during their first two years in office. There is also an interesting study from the London School of Economics suggesting that the closer a CEO is to 65, the more likely they are to accept a takeover bid for their company.
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