This year’s first half continued to see an unprecedented wave of large-scale M&A activity, with deal value up 16 percent from the previous half and up 175 percent from a year earlier for large transactions (defined here as more than $25 million), according to McKinsey & Company’s recent review of global M&A trends.
By the end of August, the value of large global M&A transactions had already surpassed $3.9 trillion, making the $4.5 trillion record set in 2007—that distant era preceding the twin shocks of the “great recession” and the global pandemic—appear within reach.
But the boom has not benefited all equally. Many companies changing hands are in the technology, media, and telecommunications (TMT) sector (accounting for 36 percent of value) or healthcare (11 percent), which together account for nearly half of all large-scale global M&A activity through June. While the recent rise in e-commerce activity likely boosted interest in these deals, TMT’s share of activity has risen steadily since 2016, while trades in the healthcare sector have remained a relatively steady presence.
Deal activity has also been concentrated geographically. After a sharp fall in 2020, the Americas (especially the United States) contributed the lion’s share of activity, with a jump both in the number of deals and in deal value, accounting for 57 percent of large-deal value globally. Mega deals (defined here as more than $10 billion) fueled growth in the Americas, contributing about 30 percent of large-deal value. These behemoths have begun gaining steam globally as well, with 15 mega deals contributing nearly a third of overall value in this year’s second quarter.
“Unlike past recessions, many companies were well positioned as they headed into the pandemic in March 2020—with rich cash reserves, strong balance sheets, and ample debt capacity. Many had also developed a programmatic approach to M&A. So, while the pandemic put a pause on their aspirations because of gyrating capital markets, that pent-up demand was released once markets settled in the third and fourth quarter of 2020, resulting in a sharp spike in deal volume and value,” says Oliver Engert, global co-head of McKinsey’s M&A Practice. Meantime, he adds, cash-strapped companies in sectors such as travel, hospitality, and retail parted with assets to generate needed liquidity, also leading to more separations—which include divestitures, spin-offs, IPOs, and regulatory remedies following integrations.
Private equity (PE) also gathered force in the first half. PE activity expanded from the low and mid-teens in recent years to a whopping 25 percent of large-deal value in this year’s first half—the highest level in five years—as companies looked to deploy capital and as new vehicles, such as SPACs, gained a foothold, notes Andy West, global co-head of the M&A Practice.
But PE companies are lately behaving differently around M&A. Increasingly, these firms are broadening their deal-making ambitions from trolling for attractive assets to full-fledged business building—in which they first buy a core platform, then bolt on other acquisitions and then cross-fertilize these capabilities with the goal of creating an enterprise that transforms performance, Oliver says. “The programmatic approach associated with the buy-and-build platform used to account for a bit more than 40 percent of PE companies’ deal volume, but that has grown to more than 70 percent. That’s a big shift,” he adds, noting that if the strategy delivers superior value, better cash flows, and lower risk, the M&A market will surely see more of it.
Corporate boards may be changing their behavior as well, as the same pandemic shocks that plunged so many individuals deep into soul searching find a similar expression in boardrooms. “With COVID-19 and its impact on the economy, I think executives have gotten bolder and more aggressive in taking an honest look at what they own,” Andy says. “I think you’ll continue to see companies who are agile and nimble in the way they reallocate resources coming out ahead in the long run.
“The more purposeful companies can be in deploying resources, the better off they will be. It might be more work to find those hidden jewels. They might have to pay a little bit more. But if you have real conviction around what you are doing, and real alignment around your strategy, those kinds of decisions become far less complicated than they would be had you ended up stumbling on a deal at a good price. So, our recommendation to CEOs is, be thoughtful, be purposeful, and continue to move.”
The more purposeful companies can be in deploying resources, the better off they will be. It might be more work to find those hidden jewels. But if you have real conviction around what you are doing ... those kinds of decisions become far less complicated.Andy West
Now the trillion-dollar question: How long is the boom likely to last?
“Recognizing that M&A is somewhat cyclical, drivers supporting a continued strong market include programmatic acquirers looking to fulfill their aspirations. We’ve seen an unprecedented number of companies for sale, across the US, particularly,” Oliver observes. “Also supporting continued activity are the strong cash positions and balance sheets that many companies enjoy, and the relatively low cost of debt. On the flip side, we see some pressures that may bring this wave to an end. Potential inflation. Potential interest rate gains. Increased protectionism—which is dampening cross-border transactions. And finally, certain industries will consolidate, and certain companies will fulfill their programmatic aspirations. They’ll need to digest what they did, which could cause a bit of a lull.”
No matter which way the market turns, the continued high premiums make extracting greater value from transactions more important than ever, Oliver adds. Delivering value during the integration by protecting the base businesses and achieving combinatorial synergies may not be sufficient. Companies will need to capture a bigger prize: transformational opportunities that would have eluded the grasp of either entity on its own. For deals to deliver on their promise in this very competitive M&A market, the integration process needs to go exceptionally well.