Global disruption in the wake of the pandemic has prompted companies worldwide to review their portfolios and re-evaluate strategy. As a result, many are divesting less high-growth businesses and channelling investment into areas where they have the greatest potential and competitive advantage. This has led to lively M&A activity as corporates seek to acquire missing capabilities, especially in technology, to reinforce this advantage.
Deals activity – in all regions including EMEA – has continued to bounce back rapidly after the lows of early 2020 when the pandemic took hold. Globally we’ve seen record deal values over the last 12 months. Technology, media and telecommunications companies accounted for a third of all megadeals in the first half of 2021. But add in companies in any sector with a technology-oriented business model and this figure increases to over half. Technology is definitely the name of the game.
Lively competition for deals
A lot of this activity has been driven by new special purpose acquisition companies or SPACs – although these have not yet gained as much traction in Europe as across the Atlantic. Private equity (PE) has also been gathering momentum as a major force on the M&A scene, with PE involvement up from 27% in early 2019 to 38% in the first half of 2021. At the same time, the PE industry’s growing appetite for larger, more complex deals has grown, increasing the value of PE deals. This all has implications for corporates, who will have to approach deals intelligently to win out in the face of more diverse and financially powerful competition from SPACs and private markets capital.
The increasing role of ESG
In the wake of COVID it’s been fascinating to see how environmental, social and governance (ESG) factors have become increasingly recognised as a driver of value creation, regardless of the industry. It’s not just climate and net zero. With more and more stakeholders also savvy to societal issues such as unequal pay, diversity and inclusion, public safety and privacy, these matters are playing a growing role in companies’ strategic orientation. This is naturally influencing the way dealmakers on both the buy and sell side evaluate the complex factors that drive deals and impact value. It’s not just corporates that have this growing awareness. Private equity houses and other powerful investors are increasingly factoring ESG into their decisionmaking. It has reached the stage where targets that fail to adequately meet ESG requirements might struggle to find an audience. No one in the M&A arena, whether selling or buying, can afford to be unaware of ESG-related risks and opportunities
What about the situation in Switzerland?
Focusing on Switzerland, we see a similar development as on the global level. Switzerland is currently experiencing an increasing number of transactions, mainly driven by cross -border activities and the same reasons as for global transactions. In addition, we see more attention to the start-up environment, where established companies are trying to acquire missing capabilities.
What’s the outlook for mergers and acquisitions?
As companies resort to mergers and acquisitions to meet the growing complexity of the challenges they face, we expect levels of M&A activity to remain high for the rest of 2021. Not all businesses have survived the pandemic unscathed, however, and as government support drops off we may see an increase in restructuring and distressed M&A as companies (for example airlines, cruise operators, aircraft manufacturers and cinemas) attempt to overcome their liquidity challenges.
“A strategic focus on ESG when acquiring businesses will be one of the keys to successfully generating value for all stakeholders in the mid to long term.”
At the same time, though, we expect to see capability-driven deals continue to gain in importance as the area with perhaps the greatest potential for returns. However, in the current environment it’s harder than ever to create value from a deal and requires a more sophisticated – or even a radically different – approach to target selection, due diligence, valuations and in particular integration. There’s plenty of opportunity, but plenty of competition as well.