Bain: Local, digital and scope to define deal-making in 2021

By Kate Birch
From digitalisation to localisation, new trends in M&A activity brought about by the pandemic will mean new organisational roadmaps, says Bain & Company...

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.

  1. 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.
  2. 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. 
  3. 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. 
  4. 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. 
  5. 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. 
  6. 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. 
  7. 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  

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