Mergers And Acquisitions Will Rise As the Vaccines Continue
Many indicators are pointing to the very real possibility that there will be a rise in mergers and acquisitions this year. Several companies that have anticipated an economic fallout resulting from COVID-19 have created a war chest of over $7.6 billion in cash and marketable securities. This has been done while interest rates are at all-time low therefore merger and acquisitions appear inevitable.
While vaccine rollouts continue across the U.S. to combat COVID-19, CEOs, investors, and consumers are becoming more and more confident each day. Many organizations that have faced financial distress will likely consider deals as a result of the setbacks from the past year.
"There were a lot of deals that were blocked because of COVID," said Pradeep Khurana, managing director of ContinuServe, a company focused on IT and finance business process outsourcing. "As things normalize and uncertainty decreases, we are seeing a lot of past deal discussions leading to actual deals. Also, there seems to be sentiment that the general economy is starting a high-growth phase which is great for general deal sentiment."
As the pandemic continues businesses will weave in and out of restrictions. The rise in unemployment as a result of the pandemic results in less spending. The presidential election, trade tensions and regulations will cause uncertainty. Acquisitions will be seen as a viable opportunity for many organizations. However, the reality of the pace of economic recovery will vary widely.
All things considered, 2021 will present opportunities for new deals. The competition to acquire organizations will be rather intense. The pandemic combined with recent developments on the geopolitical landscape have pushed companies to invest in digital and technology-driven assets. Meanwhile, stock market indices are very high and IPOs are on the rise.
Many experts feel that 2021 will see a quick rise in deals related to digital and other technology-driven assets. Experts believe that there will be more attention given to environmental and social matters and there is a push for investors to support corporations that are investing in sustainability.
Higher valuations for many digital assets and other technology-laden assets will result in many companies becoming increasingly aggressive in their efforts to acquire what they are after. Assets that are not so desirable might end up having lower valuations and sales. This will be especially true of assets that are affected by COVID-19. This will also be true of entities that use business models that are no longer useful, considering the changes that have happened due to COVID-19.
Businesses that are forced to restructure themselves will have an impact on the value of deals. The IPO market is expected to continue to be hot which will also play into values.
Valuation Will Be A Challenge For Mergers and Acquisitions
How to correctly value assets is still a huge challenge when it comes to dealmaking. The number of active deals is expected to increase and so will the competition. This will make the challenge of valuing assets all the more important. Dealmaking was strong in the last half of 2020 as values rose by 18% and mergers increased between 17% and 20% during the last half of 2020.
There was a big uptick in the number of megadeals, a deal whose value exceeds $5 billion, during the last half of 2020. The greatest amount of growth has been seen within the technology and telecommunication sector. There were 32 megadeals completed during the third quarter of 2020 and 25 megadeals during the final quarter of 2020. These 57 megadeals had a combined value of $688 billion. For comparison, 27 megadeals were completed during the first half of 2020. The combined value of those deals was $266 billion.
Many portfolios have been redefined with larger retailers and fast-moving consumer goods companies remaining resilient because they are focused on value creation strategies. These companies have concentrated on strategies to increase their corporate value. The pandemic has prompted dealmaking as these companies grow and build out new channels in order to survive while other non-core businesses may be divested to stay relevant to the market.
Overall, businesses are trending in the direction of digitalization with a direct-to-consumer sales strategy by combining technology with the in-store customer experience and contactless delivery and payment options. There is a big push toward creating resilient companies that support environmental, social and corporate governance such as creating an ethical supply chain. This direct-to-consumer movement creates opportunities for even more deals because investors are seeking companies that are innovative and adaptable.
Vaccines Prompting Merger and Acquisition Deals
COVID-19 has made merger and acquisition deals more complicated. The vaccines will help, but COVID-19 will continue to have an effect. There have been economic shocks to economies from viruses similar to COVID-19 in the past. During this time, prices dipped and valuations also decreased. However, the opposite has happened with COVID-19. Values have risen and stock markets have rebounded. With the COVID-19 vaccination rollout across the U.S. there is high confidence that deals will increase across the board as businesses continue adapting to changing times and investors keenly watch the market for opportunity to invest in the disruptors and carved out businesses.