Mergers and acquisitions were severely curtailed during the first half of 2020, but as businesses came to grasp with the extent of the Covid-19 crisis, its impact on valuations and the transformational opportunities it created, there was a significant rebound in activity. From the trough of the crisis to the end of 2020, global M&A deal volume rose about 130 percent while deal value increased by more than 300 percent, according to data by Mergermarket.
Yet, research conducted in January and February of 2021 by Chief Executive and Tata Consultancy Services shows that the majority of larger companies (those with at least $1 billion in annual revenues) experienced very little change in their M&A activity in 2020. Overall, only 20 percent of large company CEOs reported a decrease in deal volume and pace in 2020, compared to approximately 40 percent across all size groups. Instead, for the majority of large companies surveyed, data shows either an increase or steadiness in both the volume and pace of deals.
If large companies tend to have stronger financials and be less impacted by market volatility, their smaller counterparts—particularly those in sectors not too hard-hit by the pandemic—can, too, seize a moment of crisis to be opportunistic. Growth projections drive strategic decisions, and M&A is a vehicle for growth when organic growth is insufficient.
This is, of course, highly dependent on industry, and the research shows the impact of 2020 on various sectors. Twenty-seven percent of CEOs at healthcare companies, for instance, say the pace of deal accelerated during the crisis, compared to 13 and 14 percent in manufacturing and financial services, respectively. But with deal activity expected to continue to ramp up, sectors that may not have been in a position to participate in M&A activities during the pandemic may now find a whole new set of opportunities. As due diligence is better able to be carried out again, financing may also free up to underwrite M&A activity.
Overall, rapid due diligence and valuation and “virtual integration” are expected to be prominent M&A trends over the coming months, with companies looking to operate faster and invest more to make themselves more agile and competitive. As the new work modes become normalized, technology will continue to be important for connectivity and acquisition integration—and many sectors are currently exploring new technologies and opportunities in and outside of their current portfolios.
Over the next 12-24 months, companies looking to gain a competitive edge should consider building on their strengths, ensure they have a clearly defined vision of where they want to go and look at adjacencies to broaden offering footprints and spread risk of downturns. Mergers and acquisitions may not be the best avenue for everyone, and data from the research shows that of the companies planning a transaction over the next six months, the majority are considering alliances (61 percent), ahead of any other type of transaction. Less than a quarter of CEOs participating in the research said they were considering mergers at this time.
There are several reasons for that, the main one being that successful mergers require cash, capital and commitment to integrate—all of which are more challenging to find these days, especially for companies focused on cost containment to recover from the crisis. Those planning for growth are more likely to consider alliances as faster and more cost-effective means to access new markets.
Regardless of the transaction, though, the majority of companies planning a transaction over the coming months report doing so to either strengthen their competitive position within current markets (37 percent) or capture new markets (35 percent).
And while good execution planning is imperative, speed and agility will continue to be the key differentiators in the months ahead. Organizations that are the most successful in navigating M&A’s murky waters attribute a large part of their success to effective oversight and change management. Being able to adapt and, ultimately, be resilient in the face of adversity is what will differentiate companies that not only survived the Covid-19 global pandemic but also seized the opportunities it presented to thrive and boost prosperity well into the future.