Yahoo Finance’s Alexis Christoforous and Colin Wittmer, PwC Head of Deals, discuss M&A outlook for 2021.

Video Transcript

ALEXIS CHRISTOFOROUS: Despite the global pandemic, 2020 has proven to be a pretty strong year for mergers and acquisitions. In fact, we've got two big deals announced just today. AstraZeneca has agreed to buy Alexion Pharmaceuticals. This is a $39 billion stock and cash deal. And in a different industry, the education industry, the private equity firm Vista Equity Partners will buy the educational software maker Pluralsight for $3 and 1/2 billion.

Joining me now for a look at M&A activity is Colin Wittmer. He is head of deals at PwC. Colin, good to see you again. Do all signals point to 2021 sort of building on the M&A momentum we've seen this year?

COLIN WITTMER: Yes. It's good to see you as well, Alexis. Yeah, what you described are what we would call megadeals. And if you think about the trend of megadeals this year, there's been 41 announced this year alone. 31 in the second half and 19 in a third quarter.

We haven't seen a megadeal run rate like that in the third quarter for the last two years. So what you're seeing is companies racing for scale, racing to rebuild their businesses, and being rewarded by the market for doing these really large transactions. And I expect that continuation of that trend throughout '21.

ALEXIS CHRISTOFOROUS: Colin are you seeing-- what's the incentive for these companies to do these deals? Because sometimes you have companies do deals because their backs are against the wall. And there's just consolidation in the industry, and just to merely survive they need to come together. What do you see as some of the big reasons why we're seeing so many of these mega deals?

COLIN WITTMER: Yeah, we're seeing and megadeals deals and deals in general, if you think about it, because businesses need to digitally transform their business. They need to be prepared for a post-COVID world. Some of the best way to do that, right, is through M&A. And we actually see the markets rewarding these large companies for repositioning their business to take advantage of what we all hope is a sustained economic recovery once the vaccine takes hold. So like I said before, I really do expect more megadeals coming in 2021.

ALEXIS CHRISTOFOROUS: And what about the areas that you see these deals happening? I mean, we talk a lot here about the companies that have really taken it on the chin from this pandemic, like travel, cruise lines, airlines. Do you see consolidation in those areas? And I know, or I would imagine, we're going to continue to see consolidation in biopharma.

COLIN WITTMER: Yes, I agree. And if you think of the sectors, think of health care and tech. They were very modestly impacted during COVID to begin with. The rest of the sectors will all experience consolidation. We expect to see more across industry deals as well, which not something you always see coming out of a recession, because they're more challenging deals to pull off because they're across industry.

But as companies need to race for scale or they need to transform their business, it's non-tech buying into tech to make themselves more digitally fit for the post-COVID world. So I expect all of the sectors to feel this in particular, tech and health care, to keep going.

ALEXIS CHRISTOFOROUS: You know, I was wondering if, could perhaps a headwind be the valuations we're seeing in the stock market right now for so many companies? I mean, a lot of these valuations are bloated. And that doesn't seem to me like the opportune time to go buy a company when their valuation is sky high. So could that actually deter some deals, or maybe slow the pace of the deals into 2021 if we don't see a meaningful pullback in these valuations?

COLIN WITTMER: You're right, valuation's-- one of the features that didn't happen as a result of the COVID crisis is valuations didn't really come down. And the public markets kept creeping up, and private transactions looking for public multiple guidance. So if we didn't see a reset of transaction prices. Which on the one hand can put a damper, but the other hand, you have a historically low interest rate environment. And the expectation from the regulators we're signaling is it's going to stay there.

You also have a tremendous amount of capital. Keep in mind, going into this recession we had probably the longest bull run we've had in a while, so call it 10 years. So corporate balance sheets had a ton of cash and private equity had been amassing a bunch of dry powder. I think those forces alone will help overcome the higher prices.

But one thing we are seeing for sure from our clients and our messaging to them is, look, after you buy a company at such a high multiple, you need to do a lot around what we call value creation to basically help get your return out of that company. So I think you're going to see a lot of companies having renewed interest in what is the art of the possible. What can we do with this company after we bought it? And we had to buy it at such a high multiple.

ALEXIS CHRISTOFOROUS: And I think we'd have to agree that 2020 has been the year of the SPAC right. These blank check companies, so many companies coming to market using these SPACs. Do you think that's what's going to drive the merger and acquisition activity in the new year?

COLIN WITTMER: Yeah, so there were 180 SPAC transaction raised in 2020 thus far. That's about $60 billion in capital that is flowing into that sector. I do continue to expect to see SPAC sales also continue into 2021. Like I said before, there was so much capital, and it's looking for a place to get yield. And SPACs are a place with that capital is flowing.

And as you think about it, as SPACs have matured as an asset class, the terms are getting more mature. More money is flowing into it as an asset class. I do expect that trend to continue, as well.

ALEXIS CHRISTOFOROUS: All right, Colin Wittmer, head of deals at PwC. Thanks for being with us.

COLIN WITTMER: Thank you very much, Alexis.