Hands up who had their best year ever in 2020?
If you asked this question in a room full of shareholders in Pfizer or Wesfarmers, probably a few hands would go up.
But for most of us in the M&A sector, 2020 was a challenging period. After a promising start, the global ramifications of the pandemic hit home, and transactional activity started to run sideways. Deals became slower and more drawn out, as parties waited for the circumstances to stabilize. Valuations were unreliable and subject to dispute. The pandemic created contentions not just about the current positions of potential targets, but also about the ongoing, forward-looking evaluations because of the highly uncertain parameters of the current environment. For example, the social and public health impacts of the pandemic may yet be delayed.
In short, M&A in 2020 was protracted and patchy, and most companies preferred to wait for the circumstances to stabilize.
In contrast, the equity capital market was rather busy in 2020. 2020 was a year of capital raisings and IPOs. By June 2020, more than $20 billion had been raised by ASX-listed companies. Many of these companies are now poised to make acquisitions. However, some companies face a new dilemma: they are all cashed up with not much to buy.
Recently, McKinsey released a study that analyses the common traits of companies that performed well in past recessions. Those companies that performed best were the quickest ones. They were quick to:
- reduce debt;
- divest unwanted divisions;
- make acquisitions;
- cut overheads; and
- accelerate growth.
Furthermore, the benefits of seizing the advantage in a recession were long lasting: McKinsey noted that those high performing companies continued to outperform for a decade.
Data from 2021 shows that most companies are currently not moving quickly, but are operating in survival mode. Capital expenditure by the largest global companies was down by 12% in the first quarter of the 2020 financial year compared to the comparable quarter in the previous year. Only 3 sectors bucked this trend and increased spending and investment in 2020: these were the two stalwart sectors of food and drink, and (no surprise) high tech.
Applying McKinsey’s identified trends for success in 2021, in a faster, changing world, companies are advised to undertake frequent portfolio reviews of their assets. There will be increasing opportunities to make acquisitions in 2021, enhanced by low interest rates, tight margins, and the identified need to grow and enlarge.[1]
In 2020, the need for, and use of, digital technology was accelerated. This included increased demand for digital banking. An example of a fast mover is the recent $8 billion purchase by Huntington Bancshares of TCF Financial.
Almost unanimously, commentators predict there will be a huge increase in M&A transactions in 2021, as companies assess their portfolios and take advantage of the perceived pandemic inflexion point.
In the words of Joe Hockey, 2021 can’t come fast enough.
We hope all of our readers have a happy, healthy, rejuvenating holiday period and wish you all well in the year ahead.
[1] Getting larger is not related to the increased spending in the food and drink sectors.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please also note that the law may have changed since the date of this article.