9.5 min read
Increasingly we are witnessing in 2021 new M&A trends as the pandemic has changed many aspects of our world. Whilst it has accelerated virtual working and placed technology at the centre of our business models, it has also left organic growth as no more than a pipe dream for many. With low yields on most asset classes, including company balance sheets, business owners turn to acquisitions to create returns by buying under-capitalised companies that offer scale-up prospects, or by building scale via a “buy and build” strategy. Mergers and acquisitions are therefore an important part of the post-pandemic recovery. So, what are the 2021 new M&A trends that we are seeing as businesses reinvent themselves and rethink in response to the deep environmental shifts?
2021 – Emerging mid-market and disruption sit centre stage
Increasingly, we are seeing a shift away from big-ticket, scale acquisitions, with companies favouring strategic deals that offer greater long-term value. With the need to disrupt and gain a competitive advantage in consolidating markets, acquisitions will no longer be based purely on financial modelling and synergy but also in terms of how they change markets and business models. There is a greater focus on the value of the team, positioning and intellectual property post-Covid.
EBITDAC (C for post-Covid model)
Most private companies have had a price-earnings valuation for years, typically between 4-10 depending on the size of the company and the quality of the earnings. An adjusted EBITDA is the normal method for calculating these earnings. That is earnings before interest, tax, depreciation, and amortisation. The C is new and stands for Covid. Buyers will now adjust for the pandemic based on the reasonable run-rate recovery of the business. The other adjustments such as owner’s costs and extraordinary reinvestments can also be applied. Many sellers think that with weaker financial performance, now is not the time for a sale however, this is not the case.
A game of two halves – valuation pressures
A company with a robust, long-term business model and recovering earnings is a more desirable acquisition target, as too many buyers chase too few quality acquisition opportunities. Supply and demand against fewer prospects may drive values up on quality assets – which is a 2021 trend to watch. Conversely, weaker companies with poor balance sheets and damaged business models will provide value play opportunities to the strong acquirers – those with cash and a robust position. Overall, values look as if they will stay neutral, but early signs are that this masks the underlying position. An ‘auction’ at the quality end is driving up bids and laggards are being swept up ‘at’ value only or less – a game of two halves.
How to spend it? Super-abundant capital chasing the yield
Cash in successful companies in 2021 has continued to accumulate on balance sheets aided also by Government lending and furloughs during the pandemic. Borrowing is close to the rate of inflation, meaning that real borrowing costs are hovering near zero. Any reasonably profitable enterprise can readily obtain the capital it needs to acquire new businesses. The skilful allocation of financial capital is no longer a source of sustained competitive advantage but placing the business model ahead of the market to create better companies is. Acquisitions can be used to shore up weaknesses and play to the strengths of shifting business models.
At the current rate of growth, Bain & Company projects that global financial assets will surpass US$1 quadrillion by 2025. Lots of money – but how to spend it is the question? They report there is a clear determination to counter low-growth in a disruptive environment and that more than half of the executives they interviewed in a May survey (57%) were actively planning to make acquisitions over the coming 12 months, which is an increase of 50% compared to the run-up to Brexit. This may be reflective of their database but the statistics are still compelling.
Employee ownership sales pick up the pace
In the last 3 years, more than 300 companies have chosen to sell their business to their employees via a trust. These sales have 0% tax, and a soft timeline which enables owners to go for a slow transition and minimise the culture disruption often associated with a business sale – this is all very attractive. Indeed, it is estimated that nearly 1 in 20 transactions in the UK are employee ownership trust (“EOT”) sales. The ability to do post-pandemic modelling and to use forecasts in EOT sales is further driving owners looking for an exit to explore the option. The recent sale of Ice Roofing & Cladding Ltd, structured by Avondale, joins other illustrious companies such as Aardman Animations of Wallace & Gromit and Shaun the Sheep, which have been keen to protect their brands and legacies, yet secure a soft exit for shareholders.
All things tech
In 2021 every business is a tech business. The pandemic proved this with the ‘connected’ companies staying productive. This means buyers are increasingly considering technology due diligence as part of their process. Businesses with good platforms have lower future CapEx requirements, faster growth prospects and increased productivity. Companies that are behind may be value opportunities, with some buyers already identifying those businesses that do not have the know-how as potential value plays. It is also recognised that data has value, and this is part of buy-side strategic thinking. Three of the largest acquisitions were the London Stock Exchange Group plc’s US$27 billion acquisition of Refinitv, Microsoft’s US$7.5 billion acquisition of ZeniMax Media and Peraton’s US$3.4 billion acquisition of Northrop Grumman’s federal IT arm.
Float away – IPOs are back in
Initial Public Offerings (IPO) volumes fell 33% in Western Europe and 15% in Asia but increased by 30% in North America during 2020. Meanwhile, private equity listings increased by 13% in volume and raised 48% more money than during 2019. The volume of capital looking for a yield plus the latent demand due to delayed processes would seem to place IPOs firmly on the map for the coming months. Victorian Plumbing’s £1.1 billion float on profits of £26 million demonstrates that the appetite is there – and for high valuations (we did not invest – but may regret!). Krispy-Crème is also gearing for a launch, and we may be hungry for this investment. For our much larger emerging mid-market clients, IPOs are a route to de-risk, take cash out and grow and they should not be ignored.
Virtual meetings and online data rooms take small companies into the global market for sale and investment processes – previously, signature teams needed to meet but the travel restrictions have bunkered leaders in their own territories. It is too early to tell, but as the world starts to reopen, economies will be examined for long Covid and their impact on global M&A opportunities will return – however the home market may remain a high focus for many. In the banking sector, for example, the US$ 16.8 billion merger of Spanish banks, Bankia SAU and CaixaBank was driven by regional consolidation.
David and Goliath
There is a 2021 M&A trend of large buyers finding that smaller deals can provide greater flexibility as well as opportunities to harness new industry developments and technological advancements. Though considered riskier at the outset, smaller, strategic deals typically provide higher returns, delivered over a longer period. The Harvard Business Review estimates that small acquisitions typically generate additional annual shareholder value of between 8.2% and 9.3% over several years, compared with the 4.4% average of so-called “big-bet” deals.
What should I do next?
Join the discussion and register for our next webinar. We are live on 15th July 2021 with ” Exit Strategies – 11 worst mistakes” book here https://us02web.zoom.us/webinar/register/8416214222062/WN_GK3EbHcIQKOUjXvkIv7FjQ or alternatively contact us on +44(0)20 7788 8250, or email https://avondale.co.uk/contact-avondale/ for further information.