Global M&A Activity By August 2021, Tops 2020 Total
Investment banking is going gangbusters this year.
After a dearth of deals in 2020, global mergers and acquisitions (M&A) year-to-date have already topped the total number of deals completed last year. As of mid-August, the total was $3.6 trillion.
The resurgence began after the first wave of the COVID-19 pandemic and deal activity is expected to remain strong through the second half of 2021, according to a report by PWC, one of the Big Four accounting firms.
"Basically everyone got cold feet in March 2020 because no one knew what the impact of COVID was going to be on businesses," said Matthew Wiener, managing director of insurance broker Aon's M&A focus group. "Global M&A activity shut down for six months."
But, by Labor Day 2020 companies had a better handle on how COVID would affect business and came back to the negotiating table. The COVID lockdown and the issues brought about by the ensuing pandemic have caused fundamental changes in companies and market sectors, sparking a wave of acquisitions in the fourth quarter of last year that continued into 2021.
"All that pent-up demand came roaring back in," said Wiener. "It hasn't let up and has continuously increased throughout this year."
In July, 100 deals worth more than $1 billion were announced globally. It was the second-highest monthly billion-dollar deal tally of all time, second only to February 2021, according to Refinitiv, a global provider of financial market data and infrastructure. The value of the July deals surged 49% over the year-ago month, for a total value of $499 billion. This was the second-highest total after $503.4 billion in July 2007.
"The number of deals announced so far this year is also at an all-time record of more than 33,000, compared with 27,000 during the same period in 2020,” said Lucille Jones, Deals Intelligence Analyst at Refinitiv.
The first seven months of the year saw an all-time high of 620 billion-dollar deals announced, tripling the number of deals posted during the same period last year. Out of the 620, 114 deals were valued at $5 billion or more, also a record.
At the end of July, the value of the M&A deals totaled $3.3 trillion, more than double (116%) the value in the same period a year ago, said Refinitv.
By August 11, the total value of all the deals grew to $3.6 trillion, surpassing the $3.59 trillion deal value for all last year. In those two weeks, the number of deals jumped to 35,128, 24% more than all of 2020, according to Refinitiv.
The biggest deals this year have been Discovery's merger with WarnerMedia for $63.5 billion. The second largest is Dell's spinoff of VMware to its shareholders for $52.2 billion.
While 2020 was an unusual year, 2021 is still a huge improvement over 2019, when even though it was the sixth consecutive year to record more than $3 trillion, worldwide dealmaking fell 3% year-over-year to $3.8 trillion.
"Even as company valuations remain high and a seller’s market endures, demand for high-quality assets and the increasing willingness of some owners to sell them are accelerating deals that were thought to be two or three years away. Many buyers are reassessing where they are in the value chain and how acquisitions can improve their positions. But elevated transaction prices also raise the pressure to capture value in deals," said the PWC report.
"You have to also take into account that over the last five years there have been private equity funds continuously going out and raising new capital, building up their war chests," said Wiener. "They have a huge incentive to deploy capital, they weren't able to use for six months. Also, private equity companies were finally selling portfolio companies that they'd held for three to five years to new buyers."
Private equity deals account for 20% of all deals by value this year, the highest share since Refinitiv began keeping records in 1980. The number of deal announcements increased 66% year-over-year to a record 7,662. For the first seven months of 2021, private equity-backed M&A transactions surged 162% to $649.8 billion, compared with the same period last year. It was the highest year-to-date tally since 1980. July deals totaled $108.2 billion, only the fourth time to exceed $100 billion during any single month since 1980.
Biden Administration - Tax Reforms
Another reason for the surge in activity is the expectation that the Biden Administration will enact some type of tax reform starting next year, increasing corporate taxes. So if a company was considering selling itself, management doesn’t want to wait until next year when it expects a jump in the tax rate. If the seller waits until after the tax increase, the seller could receive as much as 20% less from the deal.
"It's just an absolutely crazy wave of M&A activity and we are expecting the fourth quarter to be the busiest period this year," said Wiener. "It's going to be insane."
Wiener added that this is unprecedented in the investment banking industry. This is reflected in the investment banks' high stock prices. The banks are not only engaged on the sell-side of the business, but they are also engaged in issuing fairness opinions, which help the parties determine valuation and what may or may not be a good strategic fit. He added that investment banks are also helping clients by pre-emptively searching for targets that are not for sale and approaching them to make unsolicited offers.
"We're all overworked and there's not enough people to do the amount of work that needs to be done," he said.
Special purpose acquisitions companies (SPACs) also surged this year. In July, 35 SPAC combinations were announced globally, the fourth-highest monthly tally of all time, said Refinitiv. The combined value of these deals was $101.7 billion, exceeding $100 billion for only the second time. For the first seven months, 235 SPAC acquisitions were announced, compared with just 39 in the same period last year. The combined value of these deals is $484.4 billion, accounting for 15% of overall global M&A this year, compared with 2% last year.
PWC's Deals Sector Leader, John Potter, took a broader view on what he said are the four elements driving the current deal environment:
- The nature of capital and how the capital available for deals continues to evolve.
- A commitment to purpose and talent, and how a company's approach to ESG (environmental, social, and governmental factors) and investment in workforce skills and diversity affects an organization.
- Geopolitical and regulatory shifts, as a company navigates disruptions to supply chains, trade, and other cross-border issues, and adapts to policy changes in the U.S. and abroad.
- Innovation and transformation, where tech adoption, digital agility, reconfigured business models, and other changes have retained and grown.
Technology Leading the Way
Technology deals accounted for 23% of global M&A by value for the first seven months of 2021, a 14% increase from the year-ago period and the highest share since 1980, said Refinitiv. In July, technology was the leading sector by both number of deals announced, 800, and value, with $93.3 billion. For the first seven months, technology deals rocketed 247% to a total $765.1 billion.
After technology, the July breakdown of the sectors where the deals are happening is financials ($88 billion), industrials ($83 billion), real estate ($40 billion), healthcare ($34 billion), and materials ($32 billion). The remaining $128 billion in deals were scattered among other industries.
The U.S. dominates the dealmaking this year with 447 acquirers creating deals worth $85.5 billion. This gives it a 43% market share. The United Kingdom has 1,335 deals worth $65.1 billion, for a 32% market share. The next largest deal makers were Canada with 4.8% market share, Japan with 3.5% share, and Switzerland with 2.5% share.
The U.S. also had the most companies targeted with 8,571, for a 49% share.
"When you think about tomorrow's deal drivers, the focus on innovation and capabilities is critical, especially when you consider changes in consumer consumption behaviors, supply chains, labor shortages, as well as, new consumer data and analytical capabilities that are available," said Alberto Dent, consumer markets deals leader at PWC.
So far, $730 billion worth of transactions have been announced during the third quarter, said Refinitiv.
"After the flurry of deals in recent months, private equity dry powder is down from pre-pandemic levels but still abundant, and firms are considering acquisitions beyond the usual hot targets like tech and healthcare," added PWC.
Meanwhile, SPACs typically need to make an acquisition in two years or be forced to return money to investors. After the boom in SPACS coming to market earlier this year, those companies are now on the clock, with most having a 2022 deadline.
"Supply chain stability is a concern in manufacturing, consumer, pharma, and other sectors, and companies are considering deals that can give them more control over the parts and inputs they need," said PWS. "Acquisitions that make tightly structured supply chains more flexible will likely be in play."