The foundation of deal-making in 2021 continues to focus on recalibrating strategy and accelerating the adoption of technology in the wake of COVID-19. As uncertainties have lifted, business leaders are confident in a strong economic recovery, as macroeconomic indicators, including positive GDP rates and high consumer price index (CPI) rates, promise growth—further whetting the appetite for mergers and acquisitions (M&A). In the PwC 24th Annual Global CEO Survey (2021), 76% of CEOs expect global economic growth to improve in the next 12 months. Largely undaunted by macroeconomic concerns around inflation and geopolitical factors such as tax policy, protectionism, and increased regulatory scrutiny, they appear to have a clearer vision of where value creation opportunities exist in current portfolios—and a sharper focus on M&A strategies to accelerate growth, gain scale, and digitise to reshape their businesses.
As a result, highly sought-after deals for technology and other innovative capabilities are likely to continue to command a premium. Interest rates are being carefully watched but are expected to remain low for the remainder of the year, providing ready access to cheap capital. Private equity (PE) fundraising has been brisk, and with more than US$1.9tn of dry powder, its buying power along with other private markets capital has never been higher. And while the creation of new special purpose acquisition companies, or SPACs, has paused, the sheer number of existing ones yet to find a target—by our count almost 400 of them—bring as much as a half trillion US dollars in combined cash and leverage expressly earmarked for future deal-making.
This abundance of capital is likely to shape the M&A landscape well into 2022—and may put corporate, PE and SPAC buyers on a collision course as they compete to acquire technology, capabilities, and other sources of advantage. The competitiveness of the market reflects a growing understanding among business leaders that creating value requires more than cost-cutting—and they are willing to pay more for revenue synergies that fuel long-term growth. Yet, as prices rise, along with an ever-increasing pressure to get deals over the line, they’ll need to be mindful of the risk of overpaying.
“Despite macroeconomic headwinds, the pursuit of strategic advantage is powering deals. SPACs are set to challenge both corporate and PE buyers for the best assets, pressuring dealmakers to prioritise revenue growth over cost synergies to justify high valuations.”
The global disruption triggered by COVID-19 led executives at many companies to review their portfolios during 2020 and into 2021 to reassess their strategies. These reviews have led to both strategic acquisitions and divestitures as companies redirect management resources and funds into those parts of the business with the highest growth potential and where they enjoy a distinctive competitive advantage. This has led to a trend of corporates using M&A to acquire capabilities they don’t have—often in technology—to enhance existing capabilities and reinforce that advantage.
Focusing on competitive advantages worked well for companies that were able to incorporate technology into their products and services during the pandemic. Leaders at companies that lacked these capabilities recognised the importance of acquiring them, leading to an increase in efforts to find the right target and execute a deal, whether through outright acquisition, joint venture or strategic alliance. Recent examples of such capability-led deals include Panasonic signing a US$7.1bn agreement in April 2021 to acquire Blue Yonder, Inc., a developer of software for managing enterprise supply chains—intended to strengthen Panasonic’s portfolio and accelerate the companies’ shared autonomous supply chain mission—and Walmart’s announcement in May 2021 of its planned acquisition of MeMD, a telehealth company—intended to further Walmart’s omnichannel health delivery strategy.
Efficient operations and access to capital appear to have helped large corporates fare better than their smaller, less well-capitalised competitors. A number of recent mergers have been announced by companies seeking the advantages of size and scale. Such deals usually seek cost synergies to unlock value from the combination—and stock swaps can help address issues of relatively high valuations. Deal activity in the first half of 2021 included a record number of announced megadeals—those with a deal value over US$5bn; greater scale or transformational benefits were offered as the strategic rationale behind a number of these. These included, for example, the proposed US$15bn merger between Axiata and Telenor’s Malaysian mobile operations—intended to create a new market leader in Southeast Asia—and the approximately US$30bn proposed merger between Canadian National Railway and Kansas City Southern—which would create a freight-rail network linking the US, Mexico, and Canada. Given the advantages of strategic tie-ups, we see this trend continuing in the second half of 2021 and beyond.
Capability-led deals are usually tilted more towards revenue synergies with less opportunity for cost synergies. However, a recent PwC survey found that just 13% of survey respondents reported favourable results in capturing revenue synergies, which supports what dealmakers have known for some time—realising synergies, particularly on the revenue side, is challenging.
“High company valuations only raise expectations for a successful deal and exacerbate the challenges for CEOs to create value—not just through synergies but by equipping companies with capabilities to gain advantage in the post-pandemic era.”
The record levels of deal-making, both in terms of deal volumes and values, continued from late 2020 into the first six months of 2021. The volume of deals was roughly the same across Asia-Pacific, EMEA and the Americas, although deal value was more heavily weighted towards the Americas, a similar trend to 2020.
The first half of 2021 saw a continuation of the growth in deal size, contributing to record global deal values in excess of US$1tn per quarter over the past 12 months. Fresh capital inflows led by SPACs have been an important catalyst, as has been the increase in PE investment and corporate acquisitions—particularly those focused on technology assets. Technology, media and telecommunications companies accounted for a third of all megadeals in the first half of 2021. However, this number increases to over a half when companies with a technology-orientated business model—regardless of their sector—are considered.
SPACs catapulted the megadeals announced during the first half of 2021 to record levels. Over a quarter of the announced megadeals had a SPAC buyer and an outsized proportion of those (almost 90%) involved technology. This may fuel the collision we anticipate between SPACs and the rest of the market, and force buyers to rethink their strategies to win in the current environment. In addition to SPACs, PE funds have been active investors, and the share of deals with PE involvement increased from 27% in early 2019 to 38% in the first half of 2021. PE deal values have risen as the PE industry’s appetite for larger and more complex deals has increased.
SPACs exploded in early 2021, with a record 274 new ones listed in the first quarter. SPACs raised more than US$80bn during the first half of 2021 (predominantly in February and March), more than the amount raised during the whole of 2020. That kind of growth inevitably brought increased attention from regulators, investors and the media. In April, the SEC issued new financial reporting guidance for SPACs, which resulted in a number of restatements. The creation of new SPACs slowed to a trickle. Poor post-acquisition returns may impact the ability of those SPACs yet to close a deal to secure financing. However, given the popularity of SPACs as a means of taking certain kinds of businesses public—including highly valued, technology-orientated, innovative or disruptive businesses—we don’t expect them to go away any time soon.
Even if no new SPACs are created, there are almost 400 existing ones that have yet to identify an acquisition target. With existing capital and leverage combined, we estimate they possess nearly a half trillion US dollars in buying power for M&A over the next two years—the bulk of it by the end of 2022. While most SPACs created in the first half of 2021 have until early 2023 to complete a merger, the finite window (typically 18 to 24 months) creates a level of urgency to find a target, which we believe is likely to keep competition stiff and M&A values high in the second half of 2021 and beyond. This relatively short window to identify and reach a deal creates enormous pressure for SPACs to aggressively compete with PE and corporates for targets. The result is a challenging dynamic for both corporate and PE dealmakers alike, not only to compete and win but to create value and deliver returns to their stakeholders.
“With so much capital out there, good businesses are commanding high multiples...and achieving them. If this continues—and I believe it will—then the need to double down on value creation is now more relevant than ever for successful M&A.”
Environmental, social and governance (ESG) factors have been gaining in prominence, as companies across industries acknowledge their role in value creation. Environmental issues such as net zero and sustainability as well as societal issues such as wage inequalities, diversity and inclusion, public safety, and privacy are becoming business-defining concerns, and the commitments made around them will reorient the strategic direction of many companies. Dealmakers have responded to these challenges by doing what they do best—assess the myriad of factors which influence a deal and consider how they impact value.
PwC’s latest Global Private Equity Responsible Investment Survey demonstrates that PE is taking action around ESG. More than 65% of survey respondents have developed a responsible investing or ESG policy and the tools to implement it. In addition, 72% of respondents screen target companies for ESG risks and opportunities at the pre-acquisition stage.
Corporates and PE are focusing on ESG matters as part of both M&A strategy and process. Whether preparing to divest a company or acquire one, ESG due diligence can help assess the value and the risk. Deal financing may be more difficult to find, or more expensive, for investments which are not considered ESG friendly, and for some assets the pool of available buyers may be limited.
“PE firms have radically reassessed the importance and value of ESG to their business. Understanding both the big picture and specific portfolio ESG risks and opportunities will be key to delivering sustainable value creation and investment success.”
Overall, we remain bullish on the level of M&A activity during the second half of 2021, with a greater variety of deals being undertaken to meet the growing complexity of challenges facing companies. On the one hand, there is no doubt that current market conditions remain difficult for many companies. This is particularly so for those most hard-hit by the pandemic, such as airlines, cruise operators, aircraft manufacturers and cinemas—to name just a few. Some that continue to be impacted may face liquidity challenges, especially as governments start to phase out support in the coming months, which could lead to an uptick in restructuring or distressed M&A.
On the other hand, we also anticipate a further shift towards capability-driven deals, where the potential for returns may be greatest. Creating value from a deal remains challenging in today’s environment, and the myriad of factors influencing target selection, due diligence, valuations, and integration has disrupted the traditional M&A playbook. Successful dealmakers will need to reinvent the playbook and consider a broader spectrum of inputs—not just to maintain a competitive advantage but to be ready for what’s coming next.
We continue to closely watch the changing macroeconomic landscape—inflation, interest rates, tax policy, regulation and government spending—for clues that could have dealmakers tap the brakes. However, our optimism remains as capital availability and strategic goals are playing as big as ever.
About the data
We have based our commentary on M&A trends on data provided by industry-recognised sources. Specifically, values and volumes referenced in this publication are based on officially announced transactions, excluding rumoured and withdrawn transactions, as provided by Refinitiv as of 30 June 2021 and as accessed on 5 July 2021. This has been supplemented by additional information from Dealogic and our independent research. This document includes data derived from data provided under license by Dealogic. Dealogic retains and reserves all rights in such licensed data. Certain adjustments have been made to the source information to align with PwC’s industry mapping. We define megadeals as transactions with a deal value greater than US$5 billion.