According to Bain’s 2020 Year in Review, the second half of 2020 brought a flurry of mergers and acquisitions (M&A). Low interest rates and readily available funding led companies to reconsider previously shelved deals as well as capitalize on new trends.

Bain reports that global deal value rose by more than 30 percent in the third and fourth quarters of 2020, and more than 28,500 deals were closed by the end of the year for a total value of $2.8 trillion. As of early June 2021, global M&A activity was up 158 percent over the same period last year, according to Fortune.

While U.S. deal-making didn’t quite keep up with global volume, U.S. dealmakers were busy—and continue to be optimistic. Sixty-one percent of respondents to Deloitte’s most recent M&A Trends Survey believe that U.S. M&A activity will return to pre-COVID levels within the year, with a significant focus on domestic deals.

Trend Watch

Bain’s research suggests that the pandemic accelerated some existing M&A trends:

Buying new capabilities: The pandemic created an urgency to acquire new capabilities that support a digital economy. For example, companies acquired targets that provide or augment technological capabilities for online ordering and delivery, payments, telemedicine, and teleconferencing.

Partnering for innovation: Many companies also turned to alliances and joint ventures as alternatives to traditional M&A. The development of the COVID-19 vaccine is an excellent example of competitive pharmaceutical companies partnering to accelerate research and development (R&D). Similarly, several car manufacturers invested in common battery technology, sharing the required R&D investment in hopes of reaping the benefits of accelerating development of a common standard.

Looking local: More deals were done locally and regionally during the pandemic, which likely reflects supply chain concerns. Nearly 60 percent of respondents to the Bain survey said that localizing their supply chains will be a significant factor in deals going forward.

ESG focus: Acquiring companies also paid more attention to the environmental, social, and governance (ESG) approaches of their targets, assessing both risks and opportunities. A recent Deloitte survey reported that 72 percent of respondents believe that a diverse makeup of a target company’s workforce, including representation of women and minorities, is either important or very important in the target selection process. For many deal makers, this represents a new category in their due diligence process.

Digitizing due diligence: Bain reports a majority of M&A players found it more challenging to manage deals during the pandemic, resulting in the adoption of online platforms for collaboration, risk analytics, and insights. Using new data sources to create profiles and find target companies also accelerated.

Increased valuations: Deal multiples increased in 2020, according to Bain. Certain industries thrived during the pandemic, including technology, telecommunications, digital media, and pharmaceuticals. Other industries, such as retail and energy, saw weaker valuations as fewer consumers shopped in stores and lockdowns dampened travel.

The Crystal Ball

Bain’s survey respondents expect M&A to account for nearly half of their revenue growth over the next three years, which is up 30 percent over the past three years.

What is the fuel for this activity? Morgan Stanley suggests several drivers:

Plentiful capital: The U.S. is emerging from the pandemic, the stock market is strong, and companies and consumers seem confident. Persistently low interest rates are expected to keep the cost of capital down. If this combination of factors continues, deal flows could keep increasing.

Private equity firms are flush with cash, and this “dry powder,” as Morgan Stanley calls it, may spark transactions. Also, special purpose acquisition companies (SPACs), which are shell companies created to take private companies public, will likely remain a significant force in the M&A arena, representing an interesting alternative to traditional IPOs or private sales.

Rebound in COVID-affected sectors: A clearer vision of the future is finally surfacing for businesses that were heavily impacted by the pandemic, such as transportation and energy. This clarity makes valuations and deal pricing easier, and pent-up M&A demand in these industries may burst through as the outlook continues to improve.

Increasing scale: Bigger was generally better during the pandemic, so companies may continue to look for operational scale. This may drive consolidation in some industries.

Nimble Always Wins

What leaders and companies are in the best position to capitalize on the M&A boom? As in so many instances, those with the confidence, information, and analysis to move quickly – situations can evolve fast and opportunities that might have seemed far-fetched, too late, or beyond your means can suddenly present themselves. Having a thorough understanding of your financial position as well as the ability to analyze your market and competitors can mean the difference between success and failure.

Whether you’re already in the dealmaking process or looking to position yourself to capitalize on future opportunities, it’s never too early to partner with a trusted advisor. Contact Dembo Jones’ team of accountants, valuation analysts, and tax attorneys today.