Bold sector moves to define the market in 2021 and beyond
Looking ahead to 2021 and beyond, the sectors that showed deal-making restraint during the COVID-19 pandemic will drive the next wave of activity, according to the research.
For example, the consumer sector has seen an increase in M&A involving assets that struggled through the COVID-19 pandemic, led by more financially resilient competitors, while acquisitions driven by innovative companies with a strong link to their customer base have also emerged.
Private equity (PE) firms have also been active in 2020, and they will likely be even more so as businesses and sectors reposition themselves during the anticipated recovery stage in 2021 and beyond. With US$2.8t in dry-powder available, including nearly US$1t dedicated to buyouts, private capital is well-positioned to take advantage of the value creation during anticipated 2021. The growing presence of special purpose acquisition companies (SPACS) in the market could bring other forms of capital to the deal table next year.
In addition, the increasing trend for alternative deal models, such as joint ventures and alliances, as companies take an ecosystem view, as well as divestments to enable strategic business shifts and reinvestment, are also expected to fuel deal making intentions.
Andrea Guerzoni, EY Global Vice Chair – Strategy and Transactions, says: “Companies in the consumer and industrials sectors will look to combine to take advantage of the anticipated recovery. These businesses will also be looking to adapt to a new environment, in which customer behaviours and preferences have changed dramatically, as a result of the COVID-19 pandemic. There are already signs of such developments through the strong shift to e-commerce amid moves to downsize bricks-and-mortar retail, and the reassessment and de-risking of supply chains for manufacturers.”
Impact of technology and geopolitics to inform corporate strategies
The expected increase in M&A activity comes as nearly two-thirds (62%) of executives believe that their organizations must radically transform their operations over the next two years, according to the EY Digital Investment Index. To achieve that, they are starting to turn to emerging technologies, with the internet of things (IoT), artificial intelligence (AI) and cloud computing among the most likely investments in the next two years (67%, 64% and 61%, respectively). 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 set to see an increase in deals, corporate venture capital and partnership investments.
Geopolitical changes will also inform strategic capital decisions, such as M&A and entering or exiting certain markets. According to the EY 2021 Geostrategic Outlook, analysing these risks is becoming more important in the current environment, with the COVID-19 pandemic acting as a great accelerator for geopolitical change overall.
In Europe and the US, variables such as Brexit, and the impact of any new policies as a result of the US election outcome, will play a key role in how executives are rethinking their corporate strategy and capital allocation. With M&A values in the UK already up 40% in 2020, and with 79% of US companies indicating that they are likely to accelerate M&A strategies, alliances and joint ventures if corporate tax rates increase following the presidential election, the foundations are there for 2021 to be a stronger year for M&A.