M&A may have stood still during the first half of 2020 but the second half saw a redound with deal value rising more than 30.
The Bain & Company survey of nearly 300 M&A practitioners reveal higher M&A activity in 2021. M&A will continue to be a key strategic pillar for business, with practitioners expecting M&A to contribute to 45% of their growth over the next three years, compared to about 30% over the past three years.
Anticipating 2021 to be a dynamic year for M&A, Andrei Vorobyov, Bain & Company partner and a leader of the firm’s Mergers & Acquisitions practice said executives expect an uptick in M&A activity and that M&A will become even more important for achieving growth.
“To compete in this increasingly disruptive environment, M&A practitioners need to rethink their M&A strategy and roadmap; broaden their M&A options to include corporate venture capital, partnerships and minority stakes; and further digitalize their M&A process,” he continued.
A growing urgency to divest
Divestiture activities in 2020 was down 15% in 2020, and value dropped by 21%. However, the crisis has added an urgency to divest as companies need to divert their scarce resources to the best opportunities amid increasing industry disruption.
Roughly 40% of the practitioners Bain surveyed expect a rise in divestitures over the next 12 months, with the industries hardest hit during the pandemic, such as retail, energy and hospitality, likely to see the highest level of divestiture activity.
Bain’s research indicates a buyer interest is also strong. About 62% of surveyed M&A practitioners expect more interest in acquiring carved-out assets in their industries over the next 12 months. Meanwhile, private equity (PE) interest in carved-out assets is expected to remain high in the year ahead, with general partners under pressure to continue to put dry powder to use. Across industries, 30% of respondents anticipate PE to increase its interest in buying divested assets, with the biggest anticipated rise in advanced manufacturing.
Hungry for growth and new capability assets
Technology, consumer products and healthcare stand out with the highest share of scope deals. The need for new critical capabilities was at the heart of many recent scope deals.
For example, consumers’ growing demand for direct delivery drove Target’s acquisition of Deliv, Nestlé’s acquisition of Freshly and Ahold Delhaize’s acquisition of FreshDirect.
Traditional media and retail will experience more consolidation as scale becomes increasingly necessary to compete with and outinvest digital competitors.
More local than cross-regional
Covid-19 saw the decline in cross-regional M&A in favour of local or regional deals, accelerated by ongoing US-China trade tensions. This trend is decisively accelerated by supply chain concerns exposed by the Covid-19 crisis. About 60% of Bain’s survey respondents said supply chain localization will be a significant factor in evaluating deals going forward.
As an indication of this localization, the number of Asian outbound deals into the Americas and Europe fell by 29% year over year in 2020.
With overall deal value down only 2.5%, Greater China acquirers directed 93% of their deal spending toward domestic companies, with only around 5% going to deals in the Americas and Europe, the Middle East and Africa. This represents a sharp drop from around 11% in 2019 and roughly 25% in 2016, the peak of Chinese outbound M&A.
More so than in the past, the external environment in each particular industry is setting the boundaries for how much M&A companies can do. Technology, media and telecommunications all saw strong market capitalization increases last year, while energy and financial services saw the biggest declines. Below are some of the most notable industry-specific trends Bain is watching.
Consumer products: It would be natural to blame the pandemic for the drop in consumer products deal value last year, but it represents a continuation of trends that have been playing out over the past three to five years. Bain’s research shows the industry may be due for an uptick in deals—45% of surveyed consumer products M&A practitioners expect deals to increase over the next 12 months. The most profound change in consumer products M&A is in deal mix.
Scope and capability deals now make up 60% of deals greater than $1 billion. Deal activity for insurgent brands—those that significantly outpace category growth while simultaneously reaching minimum scale—has grown twofold to threefold since 2015. These trends point to a more fundamental change in M&A strategy as the consumer products industry reacts to low growth and historic disruption in consumer needs, channel shifts and competition.
Retail: The Covid-19 pandemic hastened the shift to e-commerce, increasing the importance of M&A in the retail industry. The retail M&A practitioners Bain surveyed expect M&A to contribute almost 60% to top-line growth over the next three years compared to around 35% over the past three years, one of the highest jumps among all industries surveyed. Activity will intensify for both scale and scope deals.
Markets are looking for scale, growth and digital performance. Nowhere is this seen more clearly than in the grocery sector. Increasingly, grocers are taking creative new approaches to deals. Some are buying or partnering to integrate supply chains, while others are partnering to access new capabilities and technology and to accelerate growth of new channels.
Technology: Technology M&A roared back from an almost standstill in the second quarter of 2020 to hit record activity in deal volumes and value in the second half of the year. Tech M&A continued to trend toward more growth- and capability-oriented scope deals, representing 81% of industry deals in 2020, far more than other industries. Most significant is the rising interest of nontechnology investors in the tech space, which now account for nearly three-quarters of deals in the technology sector, up from about 60% a decade ago.
Media: In media, Bain expects a flurry of new deals over the next two to three years, with the majority of growth in media coming from video streaming. Bain’s new research shows that there will only be a few winners once the dust settles in this land grab moment. Our data shows that streaming grew quickly in the first half of 2020, but that consumer demand caps at three to four subscriptions. The report also digs into the unique nuances of integrating media companies, especially virtually, given the criticality of creative talent in the industry.
Telecommunications: Following a steep drop the previous year, telecommunications deal value grew by about 50% in 2020. The industry also witnessed a changing deal mix. Despite fears that further industry consolidation would be quashed by regulators, scale M&A rebounded. Meanwhile, infrastructure M&A, a type of deal that’s unique to telecommunications, continued apace as companies sought to monetize infrastructure assets that command three to four times the valuation multiples of the integrated telecom operators themselves.
Banking: The banking industry is primed for an upswing in M&A activity. Valuations are dropping in banking, with average price-to-book value decreasing by 35% globally in 2020. Even after gradual consolidation, banking remains a fragmented industry across all key markets, with the top five banks accounting for only 30% of total deposits in the US, 40% in the UK, and 38% in China. Unlike many other industries, regulators are creating conditions and frameworks that favor consolidation. For example, the European Central Bank recently published guidelines for consolidation in the banking sector.
Finally, there is the impact of Covid-19. Despite government interventions, the economic fallout has caused banks that entered the pandemic in a weaker position than their competitors to weaken even further, widening the rift between the less healthy banks and those that have remained relatively robust despite substantial losses and lower capital ratios. The rift will create opportunities for stronger players to acquire and for weaker players with capital ratio gaps to look into their portfolios for potential businesses to divest.
Insurance: Insurers are streamlining their businesses to redefine themselves with a narrower focus and stronger core. Divesting of non-core businesses represented about 70% of insurance deals valued at more than $1 billion over the past five years. Buyers are taking advantage of these divestitures to strengthen their market position and step into near adjacencies. As there is still considerable uncertainty about how emerging capabilities will mature, many established insurers have chosen to access new capabilities with investments and partnerships. While private technology investments by incumbent insurers slowed in 2020 from their recent pace, Bain expects a rebound in 2021 as insurers build for the future. The continued market enthusiasm for insurtechs suggests that there is no shortage of innovative ideas and capabilities that could benefit insurers.