US M&A activity to accelerate in 2021 and beyond

US M&A activity to accelerate in 2021 and beyond

– Stronger than expected rebound in US M&A value since July 2020 likely to continue into 2021.

– Despite a pandemic-fueled M&A decline in the first half, 2020 ranks 6th for largest US transactions’ value in the post global financial crisis 2007-2008 period.

– COVID-19 has accelerated the urgency for digital transformation, a key driver for deal-making as businesses look to grow and pivot operating models post-pandemic.

While 2020 proved to be a tumultuous year for mergers and acquisitions (M&A), the second half of the year is seeing one of the largest rebounds in M&A to date. The increase in year-over-year (YoY) deal value in the US since the beginning of Q3 is expected to continue into 2021 as companies position themselves for improved economic activity due to both the presence of a COVID-19 vaccine and more geopolitical certainty after a decisive US election.

According to EY analysis, with an overall value of $1.4 trillion, US M&A in 2020 is tracking below 2019’s value of $1.8 trillion, but still ranks sixth for deal values in the post-global financial crisis of 2007–2008 period. The US remains the most active deal-making nation globally, much of which can be attributed to large-scale technology deals driving the M&A momentum. During 2020, the technology sector recorded 3,171 deals valued at $447 billion, accounting for 32% of the total deal value. As a strong appetite for product portfolio enhancement and investment in R&D positions continues, the technology sector appears  ripe for continued deal-making activity in the months ahead.

Technology wasn’t the only sector that saw a flurry of M&A activity during 2020. Sectors such as financial services, with 658 deals valued at $170 billion (up 13% YoY from Dec. 1, 2019 – Nov. 30, 2020), and media and entertainment, with 151 deals valued at $87 billion (up 8% YoY from Dec. 1, 2019 – Nov. 30, 2020), were the most prominent.

The economic impact of pandemic-induced lockdowns demonstrated the vulnerability of many previously strong sectors, such as industrials (down by 36% at $97 billion compared to the same time period in 2019) and consumer (down by 38% at $43 billion). And although some sectors, such as life sciences, saw a decline in YoY deal value (down 52% at $191 billion compared to the same period in 2019), the overall number of deals recorded increased as several sector companies capitalized on the opportunities created by the pandemic and engaged in strategic deals.

Need for scale drives M&A activity

“The combination of a historically low cost of capital and robust stock prices has created an environment ripe for M&A and we’re seeing rapid-fire acquisition in most sectors,” said Brian Salsberg, EY Global Buy and Integrate Leader, who added that the appetite for scale and resiliency is a major driver of M&A activity.

“Resiliency requires being both big and nimble so that you can afford to pivot your operations as necessary during times of disruption,” Salsberg explained. “Many of the most successful companies over the past year have been those that have scale and reach in terms of people, location, technology and capital — and can flex up and down to meet a rapidly changing consumer, customer and competitor landscape by redeploying human capital, technology and assets to where they are needed at any given moment. Large grocery retailers and quick service restaurants are great examples of companies that had the scale to dramatically ramp up their e-commerce and digital businesses when COVID-19 hit, unlike smaller companies that had difficulty adapting.”

Digital M&A a top investment priority in 2021 and beyond

By highlighting the critical importance of digital technologies, the COVID-19 pandemic has provided a strong catalyst for accelerating digital investment. In fact, nearly two-thirds (62%) of executives believe that their organizations must undergo radical digital transformation over the next two years, according to the EY Digital Investment Index.

To achieve that, they are increasingly turning to emerging technologies such as the internet of things (IoT), artificial intelligence (AI) and cloud computing (67%, 64% and 61%, respectively), with a focus on improving the returns of their investments.

With 52% of executives who pursued digital technologies via M&A saying that the approach exceeded expectations and 45% reporting similarly for digital partnerships, 2021 is likely set to see an increase in digital-focused deals and partnership investments.

“It is critical for companies to choose the right mix of buy vs. build to accelerate their digital initiatives,” added Salsberg. “We’re seeing an increase in digital M&A and an acknowledgement by the majority of executives that this is often better than trying to develop these capabilities organically. However, companies need to make sure they value assets properly, sustain the entrepreneurial culture and maintain intellectual property.”

Asset-light a strategic tool to drive capital efficiency, resiliency

With an eye on recovery from the COVID-19 crisis, many organizations are reassessing their portfolios to determine which assets may be non-core and could be sold to a third party and then contracted back to the organization in an effort to transition fixed costs to a variable cost structure. The benefits to companies could include enhanced enterprise agility, improved capital efficiency and higher shareholder returns. The increased need for asset-light approaches recently is being driven by the onset of digitalization, economic uncertainty due to COVID-19, shareholder activism and unprecedented levels of dry powder within private equity.

For example, consumer products and retail companies are shifting from a traditional supply chain to a more consumer-centric, digital and multichannel experience. As a result, brands are outsourcing manufacturing to repurpose capital on marketing and customer acquisition. They are teaming with logistics providers for timely and efficient logistics and distribution. In the life sciences sector, biopharmaceutical companies are increasingly externalizing their R&D manufacturing capabilities to close innovation gaps.

“We expect more and more companies across the value chain to adopt asset-light strategies well beyond the current COVID-19 crisis,” added Salsberg. “This is largely in response to an increasing need to free up capital to invest in innovation and build more agile and resilient business models. Companies that act now to move capital-intensive hard assets off of their balance sheets can benefit from a first-mover’s advantage and ultimately create a competitive differentiation to outperform their peer-sets.”

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About EY Strategy and Transactions
EY Strategy and Transactions teams work with clients to navigate complexity by helping them to reimagine their eco-systems, reshape their portfolios and reinvent themselves for a better future. With global connectivity and scale, EY Strategy and Transactions teams help clients drive corporate, capital, transaction and turnaround strategies through to execution, supporting fast-track value creation in all types of market environments. EY Strategy and Transactions teams help support the flow of capital across borders and help bring new products and innovation to market. In doing so, EY Strategy and Transactions teams help clients to build a better working world by fostering long-term value. For more information please visit ey.com/StrategyandTransactions.

About the EY Digital Investment Index
The EY Digital Investment Index gauges how organizations will need to transform to realize their digital strategy over the coming two years. The survey queried 1,001 executives from Europe, North America and Asia from a broad range of industries at companies with more than $1b in revenue. One-third of companies had annual revenues of over $10b. The survey represents CEOs, CDOs (Chief Digital Officers), CFOs, CSOs and CIOs from industries including advanced manufacturing and mobility (AM&M), consumer education, energy, financial services (FS), health care and life sciences, private equity, technology, media and entertainment, and telecommunications (TMT).

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S. Jack Heffernan Ph.D. Funds Manager at HEFFX holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.

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