2021 saw more than US$5 trillion worth of M&A deals as more than 62,000 companies around the world changed ownership. For context, that is the equivalent of the entire German economy. No wonder banking and consultancy bonuses have led to a shortage of champagne.
But what is driving this unprecedented boom in demand for dealmaking? Almost as importantly, what do the next couple of years have in store?
The answer to the first question is multi-faceted. Many companies have spent the best of two years protecting their assets and cash in the face of a raging pandemic. Nobody wanted to invest in uncertainty. The relative mildness of the latest variants of COVID-19 and the increased prevalence of vaccines has seen some of the pandemic fog clear and confidence rise.
The impact of fiscal stimulus throughout the past few years has seen many companies build up credit and cash reserves that now need to find a place to generate a return. Cash held as an asset in such an inflationary cycle is highly inefficient, so companies are looking to consolidate their position in respective markets by buying in growth through cheap acquisition deals.
The last two years have increasingly exposed dependencies in business models that have previously been stable for decades. Whether it is too narrow an audience, too fragile a supply chain or something else that a business relies on to succeed, the pandemic has shown businesses the danger of being too exposed and having too many dependencies. Buying another business is the most effective means of addressing this.
Companies are now increasingly using M&A to buy in expertise to drive change in their business model. The drive toward digitisation and automation through things like Internet 4.0 and other new meta-realities requires a fresh skillset, new IP and unfamiliar expertise. Again, building such resources from the ground up can be expensive, time-consuming and fraught with risk. Buying an innovative company with those skills “off the peg”, circumvents R&D risk and delivers immediate results.
The final piece of the demand puzzle is competition. Every company is emerging from the pandemic facing similar conditions and questions. However, new research shows that a familiar but increasing predatory foe is stalking the same landscape, driving up competition and buying prices: Private Equity. New research shows that 40% of deals that happened in 2021 involved a PE fund. Not only is the number of deals increasing, but the deals themselves are also getting bigger. The value of companies is being driven up as the competition between PE and corporates intensifies.
As for what happens next, it is truly impossible to guess what impact economic headwinds might dampen demand for deals over the near term. Armed conflict in Europe. Runaway inflation. A new variant. The pin to prick what many suspect is a demand bubble could come from anywhere.
In the meantime, there is plenty of evidence in the analysis and insight Plimsoll provides that suggests, for many sectors of the global economy at least, the party will last a while longer yet. We have found many sectors where there is a growing split between strong and endangered companies. We have found other markets where larger, cash-rich companies are targeting smaller niche players and hoovering up “unicorn” businesses trying to capture the next market disruptor early.
As a key provider of intelligence, insight and M&A target acquisition, Plimsoll can add further anecdotal evidence of a gold rush underway across many sectors of the global economy. We have seen record demand for M&A intelligence from people looking to buy a business.
Whatever your M&A criteria, whatever the prevailing conditions in your key market, having a keen eye on the best prospects for your business, wherever you are on your acquisition timeline, is key. If a key competitor was bought out, how would that affect you? If a hot prospect suddenly became available, are you pre-prepared to beat the competition to its acquisition?
For more information about how Plimsoll can help you build your own acquisition in just 10 minutes, why not watch our free, on-demand webinar? This 20-minute video guide to making spotting targets an exercise of minutes, not months, is available here.