Global mergers & acquisitions market runs hot, finds Bain

29 April 2019 Consultancy.eu

The global M&A market looks back at a bumper 2018, according to a study by Bain & Company, with the year’s deal value only falling short of a record-breaking 2015 by a smidgen. Investors continue to be keen to leverage cheap funds to add companies to their portfolios, while corporates continue their lookout for synergetic, disruptive or innovative companies to boost their growth and long term competitiveness.

Since the record-breaking year of 2015, when strategic M&A deal value peaked at $3.8 trillion globally (around 36,000 deals), recent years have seen deal value cool, standing at $3.2 trillion and $2.9 trillion respectively for 2016 and 2017. Aided by capital superabundance, the past year however saw deal value jump to $3.4 trillion, the third highest level noted in the past two decades.

The number of deals closed in 2018 however stood at around 30,000 deals, meaning that averages deal sizes have grown considerably vis a vis the level in 2015. The US market saw major movement on the previous year, up 22% as Trump’s tax changes filtered into the market, while Europe, the Middle East and Africa saw a significant upshift in value, at 34%. 

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

All in all, the market was according to the authors of the report ‘M&A: 2018 in Review’ buoyed by a period of economic growth, growing corporate interest in deal-making amid a disruptive environment, cheap credit and strong supply of innovative companies. In fact, if it were not for a growing scrutiny on finding the right match and supply constraints, with competition driving up multiples, the volume and value of deal-making activity could have been higher.

The vast majority of M&A, about 83% by value and approximately 90% by volume, is closed by strategics. Even as value share fluctuates year to year, strategic acquirers have maintained their volume share over the past decade. The remaining share is closed by sponsors, mostly private equity (PE) firms, who have been growing in number steadily each year for a decade and now total more than 1,200. However, sponsors are struggling with finding enough investments to match their spending power – they now hold record levels of dry powder, with $641 billion earmarked for buyouts as the fourth quarter last year.

Scope deals gaining terrain

Bain’s authors also found that the very nature of deal strategies is shifting from scale to scope oriented. In 2015, nearly six out of ten deals (59%) analysed were focused on increasing the scale of companies; 2018 meanwhile saw the share of scale deals drop to 49%. While scale deals are intended to strengthen market leadership and lower cost position through the benefits of scale synergies, scope deals are intended to accelerate top-line growth by adding attractive market segments or new capabilities. In practice, transactions can also have a hybrid firm – a blend of both scale and scope.

Increase in scope-oriented deal making over the past three years“Scope deals outnumbered scale deals for the first time in 2018. We believe that this rapid rise of scope deals in response to industry disruption and growth challenges may be the biggest M&A industry development over the past decade. We expect the trend to continue…this shift brings with it tremendous implications for companies,” stated the authors.

When it comes to scope deals, in particular the number of deals aimed at bolting-on new capabilities increased sharply, from 2% in 2015 to 15% last year. These acquisitions often focused on filling gaps in company capabilities to meet changing consumer demand, entering new market segments or complying to requirements for long-term sustainability.

Taking a closer look at these deals, almost one-third of capability deals involved the outright acquisition of a capability to target digital opportunities, such as autonomous cars, e-commerce, the Internet of Things, digital manufacturing, digital security, digital content/marketing/advertising and digital healthcare. Volkswagen for instance, has purchased companies that specialise in ride-sharing and battery technologies, Microsoft acquired GitHub, and IBM picked up Red Hat.Global corporate venture capital invested

Corporate venturing

Meanwhile, companies are also increasingly turning to mergers & acquisitions in a bid to improve their competitiveness and innovation prowess. Investments have grown from $46 billion in 2016 to more than $65 billion last year. “Corporate venture capital is increasing in popularity as a route for making smaller bets in emerging technologies and business models,” found the authors.

The ratio of investment has increased sharply per industry, with technology up 4.3 times that of 2013, while financial services – into FinTech in particular – increased 23.3x. Other areas to see significant increases include advanced manufacturing and services, up 13.9x and consumer products, up 6.1x.

Related: Firms struggling with turning M&A deals into equity value.