Global merger & acquisition deal value spikes to $3.4 trillion

04 March 2019 Consultancy.eu

Global deal value last year peaked at its third highest level in the past two decades, according to a report by Bain & Company. Aided by solid merger & acquisition fundamentals and capital superabundance, the past year saw $3.4 trillion in strategic deal value, up from $2.9 trillion the previous year.

The near record for M&A was driven by momentum in the first half of the year, despite a slow-down in the fourth quarter. The vast majority of deals, about 83% by value and approximately 90% by volume, were closed by strategics, seeing them maintain their volume share over the decade, even as value share fluctuates year to year. The remainder of deals were closed by sponsors, mostly private equity (PE) firms, such as CVC Capital Partners, Carlyle and Blackstone.

According to the researchers, the number of private equity buyout firms hunting for deals has risen steadily each year for a decade and now totals more than 1,200. “They are more active and hold record levels of dry powder, with $641 billion earmarked for buyouts,” explained Les Baird, head of Bain & Company’s global M&A practice. 

The growth in deal value was driven by a range of factors, particularly corporates seeking growth amid a strong economy and digital disruption driving business model change. “Companies like growth, and it does not matter if that growth comes from organic business operations or through a well-managed acquisition machine. Investors reward the capability to sustainably add new businesses and growth.” 

Global strategic deal value rebounded from 2017, delivering another strong year for deal making

Tech on top

Digital and emerging technologies were not surprisingly the hottest deal targets. The analysis found that a significant share of deals involved the acquisitions of players active in autonomous cars, e-commerce, Internet of Things (IoT), digital manufacturing, digital security, digital marketing, advertising and digital healthcare. 

Digitally native companies, such as Alibaba and Amazon, bought other digital companies to expand their internal capabilities. Ele.me, a food delivery platform, allows Alibaba for example to expand in food and other delivery services in China. Amazon’s $1 billion purchase of pharmacy startup PillPack gives the tech giant a foothold in the rapidly growing online pharmacy space. Both moves were closed with an eye toward further disrupting industry incumbents. 

Other prominent technology acquisitions included IBM’s acquisition of open source software company Red Hat; Microsoft’s acquisition of GitHub, a web-based hosting service for version control, mainly for computer code; Salesforce.com’s acquisition of MuleSoft, a software provider for connecting applications, data and devices; and Adobe’s $4.8 billion purchase of digital experience platform Marketo.

Technology stalwarts were however not the only firms bolting-on digital capabilities, with industry leaders of course making similar moves to support their forays into the realm. Richemont, which owns an impressive roster of luxury brands, for instance secured the capability to go directly to its consumers with the acquisition of YOOX Net-A-Porter, an e-commerce platform. US’s largest retailer, Walmart, meanwhile acquired Flipkart, India’s leading online retailer, to capitalise on the e-commerce boom in the country.

Not all M&A that involved disruption was necessarily digitally based. Comcast bought Sky, the UK-based satellite TV and broadband platform, as part of a continuing consolidation of content and distribution in the media world. And Mars, the confectionery and pet food company, entered the veterinarian services business in Europe through the acquisitions of AniCura and Linnaeus.

Increase in scope-oriented deal making over the past three years

2018’s revolution: from scale to scope

One finding which catches the eye is the turning point reached between scale and scope deals. Up until last year, scale deals have always outnumbered scope deals. But in 2018, scope deals represented 51% of all strategic deals larger than a billion in deal value – “this is possibly the biggest development in the M&A industry in the last decade,” said Baird. 

Scale deals are intended to strengthen market leadership and lower cost position through the benefits of scale (namely, cost synergies). Scope deals are intended to accelerate top-line growth by adding attractive market segments or new capabilities. In reality, some deals are a blend of both scale and scope, but the vast majority lean toward one or the other. 

Bain’s consultants attribute the growth in scope deals to industry disruption. “2018 will be remembered as the year that the word disruption gained prominence in the business lexicon. Executives grappled with the convergence of e-commerce, data analytics, mobile capabilities, the Internet of Things and other fast-moving digital advances, and found themselves questioning how their business models might be made obsolete and how they should respond. For these and other questions facing business leaders, M&A turned out to be a big part of the answer.”

Looking to 2019; “We expect the trend to continue, largely because more and more executives are relying on M&A to solve their historic ‘do I build it, or do I buy it?’ dilemma when it comes to investing in growth initiatives and capability building,” commented Baird.

If the trend does continue, then it is likely to impact the balance between strategics and sponsors. Historically, strategics have held the advantage in scale deals: The proprietary cost synergies gave them a valuation advantage, a feat which they to a lesser extent enjoy in many scope deals. Further, the emergence of sponsor platforms and the growing financial muscle of sponsors is levelling the playing field a bit. Against the backdrop, “private equity firms are facing mounting pressure from investors to capitalise on their funds,” remarked Lennert Spek, a partner in Bain & Company’s Dutch organisation. 

Further commenting on the report, Peter Horsley, a partner in Bain & Company’s European M&A practice, said, “The twin imperatives to grow while riding the wave of disruption is resulting in a new era of M&A. To capitalise on these new realities, executives need to build an M&A capability. But that’s not easy. In particular, the leap from scale deals to scope deals is a large one. Companies will need to adapt and modify their diligence and integration playbooks, as they pursue scope deals for growth and, potentially, more transformative capability-driven scope deals.”

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