Why M&As are back with a bang

The Covid cri­sis has been one of the most dis­rup­tive peri­ods for busi­ness in liv­ing mem­o­ry. But where there is dis­rup­tion there is oppor­tu­ni­ty, which has tak­en the form of a cor­po­rate con­sol­i­da­tion boom. Research by Refini­tiv has found that glob­al M&A activ­i­ty in the first six months of 2021 was worth £2tn – the high­est half-year­ly total the com­pa­ny has ever record­ed.

David Dub­n­er, head of M&A struc­tur­ing at Gold­man Sachs, has called this phe­nom­e­non a “super-bloom”. He reports that cor­po­rate boards around the world have been tak­ing the chance to reassess their firms’ strate­gic pri­or­i­ties while “emerg­ing pos­i­tive­ly from what is, hope­ful­ly, a once-in-a-gen­er­a­tion pan­dem­ic”.

Helen James, cor­po­rate finance part­ner at Lon­don char­tered accoun­tan­cy firm HW Fish­er, has seen many M&A deals involv­ing busi­ness­es worth between £10m and £50m in recent months. She reports that 2021 is shap­ing up to be “pos­si­bly the busiest year for acqui­si­tions I’ve ever seen – and I’ve been doing this for 15 years”. 

James cat­e­goris­es the acqui­si­tion tar­gets she has seen into two groups: com­pa­nies that have thrived dur­ing the pan­dem­ic, rep­re­sent­ing par­tic­u­lar­ly attrac­tive invest­ment oppor­tu­ni­ties as they seek to kick on and cap­i­talise on their suc­cess; and those that have strug­gled to cope dur­ing the cri­sis and could there­fore be snapped up at bar­gain-base­ment prices. 

Prospec­tive buy­ers with plen­ty of cash to splash tend to be focused more on the val­ue that com­pa­nies in the for­mer group can offer, she adds.

A backlog of deals

Some experts attribute the upsurge in M&A activ­i­ty in recent months to the fact that many deals had to be put on hold dur­ing the depths of the Covid cri­sis last year. The UK’s with­draw­al from the EU, which occurred in Jan­u­ary 2020, may also have had a damp­en­ing effect, prompt­ing poten­tial buy­ers to wait and see what impact, if any, Brex­it would have on their mar­kets before com­mit­ting them­selves to high-val­ue pur­chas­es. Glob­al brand con­sul­tan­cy Siegel+Gale not­ed that there were only 674 trans­ac­tions over the val­ue of US$100 mil­lion dur­ing the year accord­ing to research from Willis Tow­ers Watson’s Quar­ter­ly Deal Per­for­mance Mon­i­tor – the low­est total seen since the glob­al finan­cial cri­sis of 2007-08.

There is still plen­ty of mon­ey slosh­ing about a cor­po­rate world that had, in the years lead­ing up to the pan­dem­ic, been unusu­al­ly set­tled, accord­ing to James, who says that busi­ness­es at last feel able to invest this cap­i­tal and make it work hard­er. 

Mon­i­ca Bar­ton, a part­ner in the Lon­don office of inter­na­tion­al law firm Win­ston & Strawn, agrees that com­pa­nies have been mak­ing up for the time they lost at the start of 2020. “The back­log of trans­ac­tions we’re see­ing in the mar­ket at the moment is just phe­nom­e­nal,” she reports.

But the release of pent-up demand is not the only fac­tor that’s been dri­ving 2021’s con­sol­i­da­tion craze, accord­ing to David Filmer, a part­ner in the cor­po­rate team at Lan­cashire-based law firm Forbes Solic­i­tors. 

“The pan­dem­ic has been con­tribut­ing to the high lev­els of M&A activ­i­ty, but this isn’t sim­ply down to a back­log of delayed deals,” he argues. “It’s also because the pan­dem­ic has caused busi­ness own­ers to rethink their pri­or­i­ties and reflect more on their lives. In some cas­es, hard-work­ing entre­pre­neurs are decid­ing to take their foot off the gas. This is prompt­ing busi­ness sales that might oth­er­wise not have hap­pened for anoth­er three years.”

Filmer believes it’s “rea­son­able to think that this lev­el of M&A activ­i­ty will con­tin­ue in the next six to nine months”. 

James agrees that the high vol­ume and val­ue of trans­ac­tions will be sus­tained into 2022, although it’s like­ly that the pace will dimin­ish sig­nif­i­cant­ly after the back­log has eased. 

The Covid cri­sis “has actu­al­ly giv­en busi­ness lead­ers a bet­ter per­spec­tive”, she argues, observ­ing that many lead­ers of firms that have come through the pan­dem­ic rel­a­tive­ly unscathed “are say­ing to them­selves: ‘We sur­vived that; we can sur­vive the next thing as well.’ I think it’s made peo­ple a bit more con­fi­dent in the abil­i­ty of busi­ness­es gen­er­al­ly to be resilient and adapt­able.”

Taking advantage of the boom times

Bar­ton pre­dicts that there will be a cor­rec­tion in the M&A mar­ket at some point next year. She notes that a lot of busi­ness­es in the UK “are being fund­ed by gov­ern­ment loans. At some point, that debt terms out. Then it will be inter­est­ing to see what hap­pens to those com­pa­nies.”

By con­trast, those firms that have been trad­ing strong­ly with­out state sup­port dur­ing such a dif­fi­cult peri­od for com­merce in gen­er­al have shown their val­ue to poten­tial buy­ers and great­ly increased their chances of attract­ing favourable takeover bids, accord­ing to James.

“Because they have man­aged to sur­vive the pan­dem­ic, com­pa­nies that may not have been on the radar before the Covid cri­sis have put them­selves on it,” she says, not­ing that many lead­er­ship teams have learnt how adapt­able they need to be – and how quick deci­sion-mak­ing is a key attribute of a well-run busi­ness. 

“The same prin­ci­ples apply in an M&A trans­ac­tion,” James adds. “Things are going to look slight­ly dif­fer­ent in that busi­ness as a result, but every­one needs to be on board with that idea – and every­one must also be ready to change them­selves.”