Bain: Local, digital and scope to define deal-making in 2021
Post-pandemic, organisations will need to rethink their deal-making strategies as new trends in Mergers & Acquisitions (M&A) come to fruition earlier than expected, according to Bain & Company’s Global M&A Report 2021.
While 2020 proved a rocky road for M&A activity, Bain’s M&A report reveals that the appetite for deal-making remains robust with around half of those surveyed expecting higher M&A activity within their industries in 2021 and for M&A to contribute to 45% of their growth over the next three years, compared to just 30% over the last three years.
With 2021 forecast to be a year when deal-making becomes key for achieving growth and in order to compete in what has become an increasingly disruptive environment, organisations will need to “rethink their M&A strategy and roadmap”, states Andrei Vorobyov, a leader of Bain’s M&A practice, as well as “broaden their M&A options to include corporate venture capital, partnerships and minority stakes and further digitalise their M&A process”.
From digitalisation and localisation to an escalation in scope deals, these are the M&A trends which the COVID-19 pandemic has brought about sooner than expected.
- Escalation of scope deals A few years back, Bain identified an increase in the share of scope deals aimed at helping companies expand into fast-growing markets or gain new capabilities, mostly tech and digital. This trend continued in 2020, with scope deals further increasing volume share to 56% of all deals more than US$1 billion, compared with 41% in 2015. Technology, consumer products and healthcare had the highest share of scope deals, with the need for critical capabilities at the heart of many recent deals. Take consumers’ growing demand for direct delivery which drove Target’s acquisition of Deliv and Nestlé’s acquisition of Freshly.
- Scale M&A to trend upwards Scale M&A is likely to trend upwards especially in industries where the pandemic has accelerated the disruption of their business models. Take traditional media and retail, industries likely to see increased consolidation as scale becomes necessary to compete with and out-invest digital competitors. While in banking and telecommunications, consolidation is being encouraged by regulator support, with banking in the US and Europe already seeing the start of domestic consolidation, with deals like PNC and BBVA in the US, Bankia and Caixa in Spain.
- Increasingly local supply chains While the rising scrutiny on cross-border deals and ongoing US-China trade tensions had being slowing down cross-regional deal-making for a few years, the pandemic has really sparked a decline in cross-regional M&A, instead favouring local or regional deals. This trend is accelerated by supply chain concerns exposed by the pandemic. About 60% of Bain’s survey respondents said supply chain localization will be a significant factor in evaluating deals going forward. The number of Asian outbound deals into the Americas and Europe fell by 29% y-o-y in 2020. With overall deal value down only 2.5%, Greater China acquirers directed 93% of their deal spending toward domestic companies, with only around 5% going to deals in the Americas and Europe, the Middle East and Africa. This represents a sharp drop from around 11% in 2019.
- Virtual diligences and integrations Deals rapidly moved online in 2020. Corporate M&A and PE teams have found themselves quickly adapting to the world of virtual due diligence, deal closing and integration. Yet, about 70% of M&A practitioners Bain surveyed said that diligence in 2020 was challenging. 2020 will also be remembered as the year ESG assumed a prominent place among M&A criteria, requiring the extension of target screening, the development of new diligence capabilities and the use of new data sources.
Industry-specific M&A trends 2021
More so than ever, the external environment in each industry is setting the boundaries for how much M&A companies can do. Bain outlines some of the most industry-specific trends.
- Consumer products Bain’s research shows the industry may be due for an uptick in deals with 45% of surveyed M&A practitioners expecting deals to increase over the next 12 months. Deal mix is likely to be very different in 2021 as scope and capability deals now make up 60% of deals greater than US$1 billion.
- Retail With the pandemic hastening the shift to ecommerce, M&A activity in retail is highly active with respondents expecting M&A to contribute almost 60% to top-line growth in the next three months compared to 35% over the past three. Markets are looking for scale, growth and digital performance with grocers taking creative new approaches to deals, buying or partnering to ingegrate supply chains, for example.
- Technology Tech M&A, which hit record activity in deal volumes and value in the second half of 2020, continues to trend toward more growth- and capability-oriented scope deals, representing 81% of industry deals in 2020, far more than other industries. In particular, there’s rising interest of non-tech investors in the tech space, now accounting for 75% of deals in the sector.
- Media Bain predicts a flurry of new deals over the next 2-3 years, with most growth coming from video streaming, and with just a few winners in the end.
- Telecommunications Deal value for this sector grew by 50% in 2020 after a drop the year before and the deal mix is changing rapidly. Infrastructure M&A, in particular, continued apace as firms sought to monetise infrastructure assets.
- Banking Bain forecasts that the banking industry is primed for an upswing in M&A activity due to industry fragmentation, regulator conditions and the pandemic weakening banks. Valuations are dropping in banking, with average price-to-book value decreasing by fragmented industry across all key markets, with the top five banks accounting for only 30% of total deposits in the US, 40% in the UK, and 38% in China. Also, regulators are creating conditions and frameworks that favour consolidation, and the economic fallout of the pandemic has caused banks that were in a weaker position to weaken further, creating a rift that will see the strong players acquire the weak.
- Insurance While private tech investments by incujmbent insuers slowed in 2020 from their recent pace, Bain expects a rebound in 2021 as insurers build for the future with continued market enthusiasm
Six issues at the top of tax and finance leaders’ agenda
New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.
According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.
And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.
Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.
Trend 1: Businesses seek more strategic counsel from tax
Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.
According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”
Trend 2: Tipping point for resourcing models
Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.
Trend 3: Digital tax administration is moving faster than expected
in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.
"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."
Trend 4: Data simplification and lower-cost resourcing are top priorities
Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.
At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”
Trend 5: Skillsets are shifting
Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.
Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact
Trend 6: 2020 brought productivity improvements
Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.