2020 M&A Activity
The nine months since March show a 20% decline in transaction volumes and a 13% decline in transaction value as compared to the same period in 2019, with these declines spread relatively consistently across the world.* After a very slow start, this is a much stronger performance than many of us had feared. To put it into context, the year after the Lehman Brothers’ collapse showed a 36% decline in volume and a 53% decline in value. Although in both cases the transaction values are only indicative because 55% of values are ‘undisclosed’.
Comparison with the GFC
The first, positive and most compelling difference between now and 2008/9 is that there remains a plentiful supply of corporate and private equity capital seeking opportunities – and both groups are currently, similarly active acquirers. This enthusiasm to invest remains heightened because organic growth can be challenging in straightened economic circumstances. In addition, the credit markets are open and debt remains inexpensive. Essentially, the machinery of M&A stopped working in 2008. Now, in this case of after-shock, it is running smoothly.
2019 vs. 2020
But this after-shock is more complex. In this note we will look at the transaction data for 2019 and 2020 and draw conclusions from our experience as to what has happened. We will then, perhaps boldly, seek to make predictions about 2021. As ever with an opinion piece, our assertions are a point of view rather than evidenced fact – but they are based on our experience and judgement and we hope that you find them interesting and thought-provoking.
To set the scene, this graphic* shows volume and value of M&A transactions across the major sectors since March 2020, compared to the same period in 2019.
Volume / value percentage change calculated as April-Dec ’19 vs. April-Dec ’20 with deal values less than £1bn. Bubble size represents deal volume in April-Dec ’20.
A few key observations:
- Overall there were 12,250 deals in the nine months since March 2020 versus 15,274 in 2019 under £1bn
- Of most note, and perhaps unsurprisingly, no sector reached the levels of 2019, with the exception of the low volume Pharma and Aerospace & Defence sectors
- Technology finished strongly and almost reached 2019 levels with 2,545 deals vs. 2,554 deals
- Interestingly, Technology also almost surpassed Automotive & Manufacturing as the most active sector
- Sectors such as Power & Utilities have clearly maintained momentum through an uplift in investor interest in Infrastructure, particularly in the renewables space
So what has happened in the last nine months to drive these results?
The first to wake…
...from hibernation, were the ‘Momentum Transactions’ - those that had significant momentum prior to March, and where the underlying business was strong. Bidders emerged into the light with a cautious sense of positivity. Knowing the business, wanting to do the deal, but wanting to do more work and take more time to make sure. These ‘Momentum Transactions’ that might have happened in April or May, completed in September or October - few in number, sometimes with price adjustments, but done.
The next to wake…
…were the ‘Safe Haven’ transactions in core resilient sectors such as Infrastructure. These businesses demonstrated their resilience even in the worst of times and lived up to their billing – predictable reliable cash flows – come what may.
Then came the…
‘Light Sleepers’ - after only three or four months, who emerged energetically. Businesses that had enjoyed surging demand – health services and parts of the food sector. And, most emphatically, businesses that deliver both ‘Safe Haven’ business models and dramatic growth - predominantly in the Technology sector. The combination of downside protection, market growth and counter-cyclical dynamics have pushed valuations in technology to very strong levels. And, notwithstanding the caveat regarding undisclosed transaction values, the data suggests a c.15% uplift in average valuations. The realisation of the potential in these sectors has accelerated the enthusiasm of vendors to transact and trade, and financial investors remain enthusiastic to invest – but only in the very best businesses.
Much of the market comprises the…
’Gently Stirring’ - businesses whose performance has been somewhat affected by the pandemic. Many of them have traded surprisingly well, have avoided problems with their debt, and feel they have coped. But, their benchmark is not for growth but to get back to where they were – which is not necessarily the best place from which to launch an M&A process. Many of these are in Business Services or Manufacturing, each of which showed volume declines of c.25%. Their owners are not in a rush to sell and will wait until they can evidence improved performance. We believe it will be 12-18 months before this sizeable portion of the market emerges from its ‘Covid Cave’. What this does imply is that 2022 could be a very active year.
…and finally the ‘Deep Sleepers’…
Unfortunately, there are a good number of businesses who have been much more seriously impacted by the pandemic, and whose end-markets have been closed. Most obviously in the Hospitality and Travel sectors, but also in areas of Retail, Manufacturing and Media. Of course, this is most serious for those people whose livelihoods depend on them, and the lack of M&A activity is a trivial concern. Nevertheless, in 2019 these businesses made up c.12% of the market, although it seems clear that activity will be depressed for a protracted period of time.
So what does this mean for 2021?
We should look back at the market in 2019/20 and ask the questions – ‘Excluding the now completed ‘Momentum Transactions’, how much activity derived from each of the categories listed above?’ and, given their characteristics ‘How much activity might we expect from our ‘Safe Haven’, ‘Light Sleepers’, ‘Deep Sleepers’ and the ‘Gently Stirring’ in 2021?’
Activity levels in 2021 should be underpinned by ‘Safe Haven’ and ‘Light Sleeper’ transactions. We estimate that these should deliver equivalent deal levels to 2019, with some prospect of outperformance. The impediment to material outperformance is that buyers are very discerning, diligent and risk averse. We have already seen that businesses that fall short of very high standards are much less likely to transact. Consequently, for 2021, we predict the same number of deals as in 2019 – 7,500.
The ‘Deep Sleep’ sectors, which represented c.2,500 deals in 2019, are likely to remain substantially inactive, so we estimate that deals in this category will reach only 40% of that level.
And so it all depends on the ‘Gently Stirring’. We contend that these businesses will need an extended period of time to reach new and satisfactory levels of trading. If that period is six months or so, they are unlikely to contemplate launching a transaction before the Autumn – with only a possibility that they complete in 2021 - for many it will be longer. In a period of depressed economic activity, and with the burden of proof firmly on the vendor, it feels optimistic to suggest that levels will reach 70% of 2019 levels. Consequently, we estimate deal activity at 60% of 2019 levels, that would suggest approximately 6,200 deals in 2021.
In aggregate this would suggest that overall M&A activity might reach 72% of pre-pandemic levels in 2021 which, notwithstanding the economic situation, looks like a strong result. We feel optimistic for the year ahead, however, because of the entrepreneurial energy in our markets and the dynamism and flexibility that businesses have shown. This, and the capacity of investors to adapt, adjust and deploy capital in such a climate, will deliver an M&A market that is more thoughtful, more energetic and more interesting than it has been in many years.
Predicting future activity is an art and not a science and this analysis is not scientific. It is informed judgement – much like the best M&A advice.
*All data included in this report was sourced from Mergermarket
Dataset for each time frame outlined, comprises all reported acquisitions with deal values less than £1bn, including those with undisclosed values, across all sectors and geographies