M&A Strategies : A Pandemic Perspective

With the dot-com bubble and the Great Recession came market disruptions. Along with other industries, they also affected the M&A industry, resulting in a steep drop in activity that lasted for several years. The COVID-19 pandemic also led to a decline in deal activity. However, to the market’s surprise, global M&A activity hit an all-time high of US$2.8t in H1 2021, up 131% year-on-year, marking a historic first-half since 1980.1 Even though, M&A activity has recovered faster than expected in 2021, the process of executing a deal is increasingly becoming more of a virtual game. But even as investors turn to virtual due diligence, the pandemic has, to a large extent, altered what they seek in a potential target. Market uncertainty and valuation risks can make deal financing tricky, encouraging many investors to find alternative ways of affording promising but high-valued targets.

Global M&A Deals
  • Digital Readiness: A Pre-requisite

    A year and a half into the pandemic, buyers now have greater clarity on the typical business models that are likely to generate value and are somewhat defensive to market uncertainties. The COVID-19 pandemic has accelerated many companies’ efforts towards digitalization, which is seen as essential to help them survive and exploit competitive advantages.

    Sectors such as e-commerce and fintech, which already had technology at the core of their business models, have largely been unaffected by the stay-at-home shocks, and now look ripe for a massive boom. That, in turn, has not only made potential targets more attractive, but also made digital readiness a pre-requisite for investors.

    For many buyers, technology integration will likely become a critical factor while evaluating a target’s business model. And tech companies with promising futures will continue to remain lucrative M&A targets in 2021 and in years to come.

  • Growth and Capability Assets: The Appetite Continues

    The number of capability deals has risen steadily in recent years as buyers’ appetite for such assets continues to grow. Even though, cost synergies have always been relevant in deal decision making, expansion of business scope and capabilities via M&A has become particularly popular, especially in the post-COVID world. According to a recent survey more than 50% of PE and VC executives are targeting capability assets including targets in artificial intelligence, robotics, the Internet of Things, extended reality and 5G.2 However, the typical cost synergies that are easier to achieve than revenue synergies, are not assured in capability deals. And yet, high purchase multiples often mark these deals.

    The number of scope deals varies by industry, but in general, healthcare, technology and consumer products have seen more scope deals than any other industry. In recent years, the need for new critical capabilities has been the guiding force for several deals in these industries.

    For example, growing market demand for direct delivery was the rationale behind US retailer Target’s acquisition of delivery services business Deliv; Nestlé’s acquisition of healthy meals delivery company Freshly and Ahold Delhaize’s acquisition of FreshDirect. These deals demonstrate that acquirers are eager to bring the necessary capabilities in-house and shift their focus from cost synergies to expanding capabilities in order to meet evolving consumer needs and better manage challenges posed by market uncertainties.

  • Scale and Survival: A Wave of Consolidation

    The COVID-19 pandemic has changed several dynamics of deal making. It has also proved right the hypothesis–“scale matters.” That is because the scale of a business can help it survive unexpected market upheavals. With the pandemic disrupting expected cash flows, many businesses have been rescued by their operational scale. Scale can also help access alternative sources of financing. As the pandemic continues, corporates are likely to remain committed to strengthening their market positions and further investing towards scaling-up.

    As scale M&A remains attractive to corporate acquirers in the coming months, consolidation is likely across many sectors. The trend may be more prominent in industries where business models have been challenged by the pandemic. Companies in traditional media and retail, for instance, could see a wave of forceful consolidation with their digital peers.

  • Stock-for-stock: A Good Deal

    Surging deal volumes are proof that buyers have found solutions to many problems brought on by the pandemic. For many listed companies, opting for stock-for-stock mergers has become a go-to strategy as a way to quickly fund deals. Corporate acquirers are taking advantage of their highly valued shares to pay for the premiums in a target’s valuation. While issuing new shares may have an undesired dilution effect on acquirer’s shareholders, such risks hinge more on the relative valuation of both the companies.

    Deal announcements such as Analog Devices’s US$21b acquisition of Maxim Integrated Products, Just Eat Takeaway’s US$7.3b acquisition of Grubhub, Chevron’s US$5b acquisition of Noble Energy and Clarivate’s US$6.8b acquisition of CPA Global, among others, suggest that corporates are inclined to opt for stock-for-stock mergers, given high valuations. The trend is more prominent in the technology sector as tech stocks are at an all-time high. Nearly 50% of tech deals in the US in 2020 included a stock consideration, as compared to 27% in 2019.3 Hence, the market can expect continued rise in stock-for-stock deals, in 2021 and beyond.

  • SPAC: Going Public During COVID-19

    Special Purpose Acquisition Companies or SPACs have been gaining popularity globally for some years now, but they have been particularly in favour during COVID-19. As the pandemic created disruption in the financial markets, making it difficult to raise money through a traditional IPO, these controversial vehicles made a comeback in 2020, which saw 248 new SPACs raising US$82b in the US, exceeding 2019 volumes by five times. Not only are more companies getting in on the SPAC action, but the newcomers are also larger in size. The average size of the SPACs has increased from around US$250m in the previous years to US$336m in 2020.

    Today, many private companies are keen to merge with a SPAC as traditional IPOs can be time-consuming and more expensive. Even though, these entities come with risks for SPAC investors; for target companies, SPACs offer a way around the stringent disclosure requirements of a traditional IPO. It is likely that we will see a significant SPAC presence among M&A bidders in 2021 as they face a finite window to identify targets. Between Jan 1-April 7, 2021, nearly 304 SPACs had raised a combined $97b around the globe.4


Given the surge in M&A deal volumes in H1 2021 and the number of mega deals announcements, it is evident that financial sponsors are sitting on a mountain of dry powder and deep-pocketed corporate buyers are actively looking to invest in emerging capabilities to fuel growth. But buyers in 2021 increasingly have a new lens to evaluate targets. Meanwhile, other market participants are keenly watching how technological integration will take the front seat in ensuring deal success.

1Refinitiv, RocSearch Analysis
2BDO 2020 Private Capital Outlook Survey
3U.S. tech companies use their expensive stock to pay for acquisitions, Reuters, March 25, 2021
41Q21 Global M&A Report with financial league tables, Mergermarket, April 7, 2021

Shruti Dalmia
Senior Analyst - Private Equity

About RocSearch

RocSearch provides extensive buy-side and sell-side support to leading private equity firms, corporate finance advisory firms and corporate M&A teams. Our data intelligence-driven offerings span buyer and target identification, market and commercial due diligence support, investment thesis validation, market mapping, comparable and intrinsic valuations, competitive benchmarking, ESG assessments, and capital structure analyses.

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