M&A activity dropped during the first two quarters of 2020 after COVID-19 created economic conditions not seen since the Great Depression. As the business world adjusts to the new normal, executives regained confidence in their companies’ outlook and the global economy. As a result, dealmakers significantly increased M&A activity. Companies and private equity firms closed $1 trillion in M&A deals during the third quarter of 2020—an 80% increase from the second quarter. Dealmakers also set a third-quarter record by closing 36 deals worth more than $5 billion each.
Executives remain optimistic the rebound will continue into 2021. According to a recent Deloitte survey, 61% of corporate M&A executives and private equity firm professionals expect U.S. M&A activity to reach pre-pandemic levels within a year.
What’s driving this turnaround? A favorable deal-making environment, growing comfort conducting business virtually, and the rise of alternative M&A transactions fuel this increased deal activity.
1. An Ideal Financial Environment for M&A
COVID-19 created a fluctuating global economy, but it also shaped conditions conducive to M&A activity.
To start, interest rates are at or near historic lows, and borrower-friendly loans give businesses the ability to maximize ROI when buying assets. Meanwhile, liquidity is high. Private equity firms around the world entered the year with approximately $2.5 trillion in “dry powder,” or cash they were able to invest. Non-financial corporations in the U.S. hold $4 trillion in available capital.
Additionally, COVID-19’s economic downturn forces many companies to re-examine their investments and potentially sell nonessential business units. The EY 2020 Global Corporate Divestment Study expects these divestitures to increase as companies rebalance portfolios. EY discovered that more than three quarters (78%) of companies surveyed had planned divestments. As an example, say a Silicon Valley SaaS company recognizes that supply chain instability threatens the profitability of its European AI subsidiary. To mitigate risk and refocus on core business areas, the software company sells its European business unit.
Meanwhile, other companies see the value of diversifying their businesses to become more resilient to downturns in a single industry or market. Alison Harding-Jones, head of M&A for Europe, the Middle East, and Africa at Citigroup, says companies protect themselves against future economic volatility by becoming “bigger, stronger, more diversified and better insulated.”
This shared desire to consolidate and diversify, combined with the low-interest rates and surplus of available cash, creates an ideal scenario for an M&A rebound.
2. Virtual Deal Closings
In the earliest days of the COVID-19 pandemic, M&A activity stood still as travel restrictions and social distancing practices forced executives to transition from conducting business in person to online. More than half-a-year later, many companies comfortably manage business virtually, contributing to the rise in M&A transactions.
According to Deloitte, 87% of M&A professionals say their organizations effectively manage deals in a strictly virtual environment. More than half (55%) believe that companies will prefer to close deals virtually, rather than in person, after the pandemic.
Government agencies across the world also continue to adjust to the new normal. Many introduced legislation that permits companies to close business deals using electronic channels, rather than requiring face-to-face meetings. As legislation changes, so does technology. Executives now comfortably use virtual deal-closing features, such as online notarizations and electronic signatures, to finalize M&A transactions.
3. Increase in Alternative M&A Transactions
In traditional M&A transactions, companies acquire and absorb other assets into their corporate structures. Alternative deals involve collaborative, partnership-oriented agreements. Statistics show that companies increasingly seek out alternative M&A deals.
According to Deloitte’s recent survey, 45% of corporate M&A executives plan to eagerly pursue alternatives to traditional M&A. These alternative transactions include alliances, joint ventures, and Special Purpose Acquisition Companies (SPACs).
SPAC activity is surging. According to SPACInsider, 84 SPACs went public year-to-date through September 2020, raising $33.9 billion. In all of 2019, only 59 SPACs went public, for a total of $13.6 billion.
Mark Purowitz, principal at Deloitte Consulting LLP, attributes the rise in alternative M&A activity to COVID-19. “Companies were starting to expand their definition of M&A to include partnerships, alliances, joint ventures, and other alternative investments that create intrinsic and long-lasting value, but COVID-19 accelerated dealmakers’ needs to create more optionality for their organizations’ internal and external ecosystems.”
How Companies Maximize Efficiency in M&A Transactions
Despite the rise in activity, HR operational challenges in M&A transactions remain. Companies that acquire, absorb or partner with other firms must onboard and manage new employees quickly and compliantly. When new employees span multiple countries, managing the new global workforce is costly, tedious, and time-consuming.
During M&A transactions, companies often use a TSA (Transition Services Agreement) to manage employees. These agreements outline each party’s responsibility during a deal. Most TSAs involve the buyer paying the seller to maintain control of HR, payroll, and employee benefits for an extended period during or after the transaction. However, because TSA agreements are costly and prevent the buyer from immediately integrating new employees, many buyers seek an alternative to TSAs.
An increasingly common TSA alternative is to partner with an International PEO (Professional Employer Organization) provider like Velocity Global. With International PEO, companies focus on closing deals and integrating the new assets, while our experts seamlessly handle onboarding and compliance of a new global workforce. Services include:
- Providing HR, payroll, and employee benefits during transactions
- Enabling buyers to legally employ workers in international markets while establishing a foreign entity
- Ensuring full compliance with local labor regulations in a range of worldwide markets
As a result, buying companies immediately integrate their new workers, rather than relying on the seller to manage employees during and after the transaction. By avoiding a TSA, Velocity Global provides companies and employees immediate clarity on their role during an M&A transition.
Ready to learn more about how Velocity Global streamlines your M&A process? Get in touch.