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2021 midyear outlook: M&A thrives as companies pursue value

With companies continuing to explore acquisitions, divestitures and other transactions, deal activity in the second half of 2021 is expected to remain strong, building on the resurgence that began after the first wave of the COVID-19 pandemic and has continued at a steady clip this year.

While the pace of recovery has varied among companies and sectors, and some have faced fundamental changes as a result of the health crisis, US deal volume and value overall are up from 2020, according to a PwC analysis of Refinitiv data. And based on our forecast, 2021 deal volume will outpace last year’s. Our analysis of economic indicators, capital variables and corporate performance predicts a volume increase that could reach double-digit percentages. Meanwhile, US deal value through May has put this year on track to dramatically exceed the 2020 total.

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.

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What's driving deals in 2021

PwC's Deals Sector Leader John Potter and other partners discuss the deals outlook for the rest of 2021.

What to watch in future deals

The nature of capital

Low interest rates mean inexpensive debt is available for acquisitions, but even if rates increase, some sectors could benefit. Insurance companies, for instance, could see more positive returns on equity if rates rise in response to inflation. In other industries, such as banking, high share prices mean many deals can be done entirely in the stock markets, with no need for additional financing.

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. Consider one PE firm’s recent acquisition of a crafts retailer based on shifting consumer behaviors due to the pandemic. As for SPACs, most typically need to make an acquisition in two years or be forced to return money to investors. After the recent boom in issuances, those companies are now on the clock in 2021 and especially will be in 2022. But keep in mind that about one-third of megadeals this year were SPAC reverse mergers. So big SPAC-related transactions certainly are a possibility in the months ahead.

Geopolitical and regulatory shifts

The globalization-versus-protectionism debate persists in the US and other countries, and the key business issue will likely be balancing efficiency with agility and resilience. 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. Acquisitions that make tightly structured supply chains more flexible will likely be in play.

Regulatory differences between countries could lead to more divestitures in such sectors as banking as firms seek to be nimbler and narrow their focus on growth opportunities. In the US, a lack of major changes in healthcare policy to date should keep deal flow steady. But increased government scrutiny in areas such as tech and pharma could lead some companies to target midsize or smaller transactions that wouldn’t raise antitrust concerns.

Innovation and transformation

The pandemic not only accelerated the digital economy but also challenged companies in many sectors to be more innovative in how they deliver products and services. But innovation also extends to new business models that aim to meet customer expectations that have changed. In the automotive sector, for instance, the accelerating momentum toward autonomous vehicles is one reason most of the top 10 deals by value to date in 2021 have been for tech businesses.

In healthcare, technology investment usually has been related to back-office operations. But providers are now looking at how tech acquisitions can improve the patient experience — from access to electronic medical records to the ease of telemedicine — while also lowering costs. In addition, medical device companies are determining which deals can enable them to best meet increased demand for real-time data and patient monitoring in what is likely to be a much more virtual age post-pandemic.

The bottom line

Acquisitions, divestitures, IPOs and other deals can be instrumental in how companies continue to navigate the disruption of the past several months and the opportunities in tomorrow’s transformed landscape. The risk of not capturing value in a transaction is very real, yet the focus on creating value has never been sharper. Going forward, success will be defined less by striking a deal and more by what a company does with the deal.

New dimensions of deal value, such as a company’s approach to environmental, social and governance (ESG) issues and its commitment to talent, offer opportunities for buyers and sellers alike to help position themselves as attractive deal partners. The better you understand these dimensions and adjust your value creation strategy, the greater the chance your next transaction will be a win.  

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Colin Wittmer

Deals Leader, PwC US

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