The pressure is on to reconsider deal strategies to stay competitive during an uneven recovery.
The uncertainty of today’s environment demands decision-makers make the right moves to capitalize on emerging opportunities. With businesses recovering at different rates and record levels of deal making over the past year, potential buyers and sellers may need to reconsider their deal strategies to stay competitive and prepare for what’s coming next.
Global deals skyrocket
It’s harder to get a full picture of the COVID-19 pandemic’s impact on global deals when we look at the annualized data, with US$3.47 trillion in 2019 and US$3.35 trillion in 2020.
Drilling down to a quarterly view, there were record levels of deal-making—both in terms of deal volumes and values—from late 2020 into the first six months of 2021. Deal value over the past four quarters (2020 Q3 to 2021 Q2) totaled US$4.64 trillion, which is higher than any year in the past decade and beyond. The scale is so large that it’s more than a trillion dollars over the total of US$3.47 trillion reached in 2019, which was considered a highly active year.
In the past four quarters, we also saw more than 57,000 deals, a decade high. The same trend is happening in cross-border transactions, with more than 15,000 deals in the past four quarters—beating every year since 2010.
Transformations drive deals
Businesses have been focused on transforming their operations over the past several years, and the pandemic has only increased the speed and scale of the change. For example, the aviation industry is evolving to meet anticipated demand in the next decade, and the food and beverage sector is looking to partnerships to empower healthier, more sustainable choices.
Digitization and automation of the workforce was in place pre-pandemic but is now a large driver of deals activity. During the early stages of the pandemic, almost every business faced significant and unprecedented shocks, and most companies responded by accelerating the deployment of digital — in some cases, accelerating years’ worth of digital transformation work in a matter of months. Social distancing has boosted demand for automation, robotics, direct-to-consumer offerings and remote-working technologies.
What's more, the environmental, social, governance (ESG) agenda is a topic that started 2019 in the top five of CEO issues — but it’s now very top of mind. This may generate a lot of deals activity as organizations look at their ecological footprint and look to purchase, rationalize or divest assets. Moving forward, investors are likely to see ESG as a critical element to building a more sustainable business that can better adapt to potential market shifts.
Where are we headed?
It’s clear that not all recoveries are created equal. Constance Hunter, Chief Economist at KPMG in the US, believes a K-shaped economic recovery is forming, where different parts of the economy are recovering from the pandemic at different rates and magnitudes. Already, there are signs of this across the economy — with a strong bifurcation between different industries, geographies and households.
Some sectors could face a tougher road to recovery. Government restrictions to contain the virus, combined with more cautious consumers, continue to hamper services-related activity in sectors such as entertainment, brick-and-mortar retail, transportation, travel and hospitality.
- Aviation continues to be one of the sectors hit hardest by COVID-19,but the industry should eventually return to and even exceed pre-pandemic volumes. The current lull becomes an opportunity to evolve ground handling capabilities to keep pace with expected transformations across the sector.
- The consumer and retail sector, while significantly impacted by COVID-19, is leveraging deals at a record pace to adapt and transform. Activity is primarily being driven by the need to expand direct-to-consumer capabilities, expand on channel opportunities and continue their portfolio transformations.
On the other hand, sectors like technology, FinTech, healthcare, pharmaceuticals and life sciences (e.g. advancements in innovative gene therapies) have come away as winners. In fact, the technology sector accounted for a significant percentage of deals in the first half of 2021 (22.5% of global deal value and 20.8% of global deal volume1).
This split is expected to drive deal strategies going forward, as those in stronger positions may be more able to accumulate the necessary assets and capital to purchase those in more distressed positions. Less desirable assets could see distressed sales at lower valuations, particularly assets in sectors more adversely impacted by the pandemic or with business models that are no longer viable given the structural changes taking place.
With continued low interest rates and private equity firms’ growing war chests, it appears that this year’s strong deals market may continue. And if interest rates show any indication of rises, these trends may accelerate as buyers move up plans to lock in lower rates.
Buyers need to be sure the value is there
Creating value from a deal is challenging in today’s environment, and many factors have disrupted the traditional M&A playbook. Business owners may need to consider their value creation strategies as dealmakers take a more proactive — even aggressive — approach to acquire the assets they want:
- Understanding the value creation process: Value creation is the capability to detect, quantify and realize performance improvement in a business — and this needs to be delivered quickly to be relevant in most deals. But uncovering value within an organization isn’t about intuition. It’s a fact-based process that requires the right capabilities and the right technology investments. Moving forward, it’s important to have a deal process that moves beyond standard analysis, blending a risk- and value-focused look at a target with sector-specific analysis of value drivers.
- Staying confident in a competitive deal environment: Deal values have grown significantly over the past five to 10 years, with a significant uptick in the past 12 months (See above chart on quarterly deal data). Buying into a highly competitive deal environment requires an equally high level of confidence in meeting your investment objectives. With the days of financial engineering and high tax shields behind us, performance improvement becomes the key differential.
Advanced analytics and emerging technology can provide the necessary capabilities to address these new needs and can be deployed at deal speed to deliver insights in order to deliver on incremental value and thus drive competitive advantage.
- Facing sector-specific pricing challenges: It’s vital to understand the nuances of certain sectors to help businesses bridge the gap between price and value. Businesses face real pricing challenges, so they should understand where they can create value in order to compete for assets in hot markets. It’s important to understand where incremental value could be generated, but the critical insights required in this environment are often deeply hidden in sector signals and transaction-level data that are often missed by the status quo’s (often manual) approach to strategy and analysis.
- Bringing visibility to ESG: While buyers want to understand value drivers like cash flows, they also need transparency on risks. Increasingly, investors, consumers and other stakeholders are evaluating performance through an ESG lens. For example, quantifying the ESG impact on business valuations is likely to be a hot button over the next years. Whether preparing to transform, buy or sell, ESG due diligence can help assess the value and the risk. What’s more, deal financing may be harder to find for ESG-unfriendly investments.
The transformation of entire industries are continuing at a rapid pace. The current pandemic was the accelerant to a process clearly underway pre-2020. At some point, while we hope to look back at the pandemic in the rear-view mirror, the crystallization of environmental, societal and governance concerns will likely be one of the lasting legacies of our time. Having a clear definition of value in this context, and how to secure it in the deal environment will continue to play a role in achieving these goals.