The economic impact of the Covid-19 pandemic has hit the global economy hard in some cases. German companies have also had to deal with the consequences of short-time work, falling margins, supply chain problems and, in some cases, insolvencies. These effects did not leave the M&A market unscathed, although the impact is far less drastic than what was suspected at the beginning of the pandemic.
At the end of the first year of the pandemic, European M&A volume stood at EUR 790 billion (-20%) and 14,572 transactions (-17%), the lowest level since 2013. The high level of uncertainty combined with increasingly severe restrictions on public and economic life led to many announced transactions being suspended for the time being. Thus, Q2/20 will go down in history as the weakest quarter since Q3/09 for the European M&A market. In our analysis of the first half of 2020 which we performed last year, the chances for a catch-up in the second half of the year were high, due to the stabilization of the economic sentiment (European Economic Climate Indicator (ESI) with an increase of 21% to 77.2 in Dec’20 compared to Apr’20 with 63.8). With the increasing relaxation of Covid-19 related measures over the summer, transaction volumes also recovered in the last two quarters, in line with the optimism of dealmakers. Europe had become accustomed to closing deals in the “new normal.”
2021 is on track to become a record year for M&A globally. In the first half of the year, global M&A volume already reached EUR 2.4 trillion (+131%), the US account for the largest market share, at EUR 1.1 trillion (+249%), Europe is also well above H1/20 with EUR 498 billion (+39%) and has already reached two-thirds of the full-year 2020 value. It is interesting to note that three sectors in particular are contributing significantly to the boom. According to an analysis of global M&A activity by Refinitiv, the target markets technology, financial services and energy have grown the most compared to the same period last year. Global deal volume in the technology sector totaled EUR 750 billion in H1/21, more than triple the 2020 level. The number of deals increased by 52%. The share of financial sector deals in the total volume increased by around one-third year-on-year to 11%. The energy sector accounted for 11% of M&A activity, an increase of 188% year-on-year.
1. Megatrends – Fueling the M&A market
Back in September 2020, we analyzed that M&A appears to make particular sense in certain target markets due to social megatrends. This assessment can be confirmed today, as shown by a comparison of the shares of key sectors in the total volume of transactions, as well as the current market development (Morgan Stanley, Refinitiv). Digitalization, healthcare, sustainability, transportation, finance, and consumption have proven to be particularly promising. The exceptionally good year for M&A, as well as the outperformance of some sectors, can be attributed to several specific drivers.
One is the increased confidence of dealmakers due to the recovery of the global economy, widespread relaxation of “lockdowns” and advancing vaccination campaigns. On the other hand, continuing low interest rates, low borrowing costs and a correspondingly high level of liquidity as well as well-endowed “war chests” of investors are contributing significantly to the current boom. Private equity-backed acquisitions accounted for 18% of M&A activity in H1/21. The total value of PE buyouts executed reached EUR 453 billion, doubling year-on-year, and the number of PE-backed deals rose to 6,500 globally (+76%).
In addition to the extremely active PEs, there is an increasing number of special purpose acquisition companies (SPACs), through which 201 transactions with a total value of EUR 329 billion have been executed to date. This corresponds to around 14% of the total deal volume. Due to the large number of potential buyers, competition is fierce, especially for very attractive targets.
The Covid 19 pandemic is also contributing to the current M&A boom. It is the fuel for profound social and economic changes and has ruthlessly exposed individual weaknesses in supply chains and business models. The need for greater focus has increased the pressure on many companies to quickly address these new commercial and operational challenges. Many decision-makers are now faced with a buy-or-build decision, and M&A offers companies and investors a quick and comparatively straightforward solution to this. This trend can also be seen in the continued strong growth in transactions and valuations in the technology sector.
Source: IMAA-Institute; Refinitiv; Helbling Research
Technology, clean energy, and financial services are increasingly emerging as key target markets for investment. Consequently, deal activity and valuations have risen rapidly. One example is the sector surrounding CO2-neutral energy production and use. In the first half of the year, purchase prices here rose significantly compared with the same period last year. Buyers paid a median of 3.4x sales (1.5x in the previous year), and the median EBITDA multiple rose to 11.4x compared to 9.4x (Mergermarket).
2. ESG dramatically changes the rules of the M&A game
Neo-ecology is certainly the megatrend with the strongest long-term socio-political influence. It translates into our economic actions via the required ESG conformity and is now more or less synonymous with the term economic sustainability. The criteria by which ESG compliance or contribution to sustainability is measured are currently still under development, but corresponding concepts have already been pre-sketched in regulatory terms and are gradually being reinforced.
Regardless, the pressure to act is great. Regulation to protect the climate is developing at a rapid pace. In July 2020, the EU Taxonomy Regulation came into force, requiring companies to account for the first two goals of “climate protection” and “adaptation to climate change” as early as the 2021 financial year. This reporting obligation is still limited by size thresholds in terms of number of employees and sales volume. However, the EU is planning to tighten these thresholds as early as 2024, with a further significant tightening three years later. Capital providers will also be held to account. Based on the European Disclosure Regulation, banks and investors have been obliged since March 10, 2021 to disclose their integration of ESG criteria when granting loans or making investments.
With the publication of the Intergovernmental Panel on Climate Change’s new report on climate change on August 9, 2021, at the latest, it is clear how urgently action must be taken structurally and thus also in the economy. Every single company must react, otherwise it can get expensive. Lack of ESG compliance may then mean a noticeable price increase in financing – whether equity or debt. At worst, it means no ESG compliance, no loan, or no financing round. The same applies to takeovers, and especially by financial investors such as PEs. This does not yet consider the increase in the cost of production or service provision due to the CO2 pricing introduced in 2021 and its significant increase as of 2025.
M&A can help meet the criteria in three ways:
- Expanding and standardizing ESG due diligence as a fully-fledged part of the usual due diligence phase in M&A processes
- The investment in sustainability-enhancing or sustainable assets to build an ESG-compliant portfolio by financial investors
- The acquisition of ESG compliant companies, process steps or supply chains by strategic investors
Initial awareness has already been raised. Based on an analysis by EY, the renewable energy asset class attracted about 2.7 times more transaction volume in H1/21 than in the same period last year, just under USD 97 billion. However, this asset class has existed in the market for a long time and seems to be perceived as the most obvious way to obtain a positive ESG rating so far.
On the other hand, there is still room for improvement in the acquisition of entire companies or parts of companies to shape one’s own value creation in a sustainable manner. According to a study by Acuris and Baker Tilly, 65% of corporates and PE investors surveyed already consider ESG criteria to be very important or important in M&A. So far, however, only slightly more than half have backed out of a deal because the asset in question was not ESG-compliant. There is also a significant difference between PE and corporates. While 60% of PEs focus on ESG in the investment, ESG is only relevant to less than half of the corporates surveyed (44%). In short, strategic acquisitions still have little focus on sustainability. For the time being.
After a historically weak Q2/2020 for the European M&A market, 2021 seems to become a record year for deals. In addition to extremely active PEs and an increase in the use of SPACs this year, the Covid-19 pandemic has also contributed to this M&A boom. In certain target markets, the crisis has even fueled the volume. In addition, the megatrend neo-ecology is slowly gaining momentum and has the potential to have a lasting impact on the M&A market.