- Q1 saw robust M&A activity, with tech, industrials, and finance the leading sectors by volume.
- SPACs, the new buzzword on Wall Street, was a major source of M&A funding, though this could change as the regulatory environment and investor sentiment change.
- We expect the rest of the year to be active for mergers and acquisitions, as several fundamental factors combine to provide strong tailwinds. The technology sector will likely continue to stand out as the highest volume.
For better or worse, those observing financial markets can’t say they were bored over the past year. We saw a near-unprecedented slump in Q1 of 2020, weighing on risk appetite as the full gravity of the past year settled over financial markets. Almost a year later, sentiment has rebounded strongly. This is evident in most markers of economic activity, including mergers and acquisitions.
As predicted, M&A activity reflects a more robust economy, as well as greater confidence about the future. In line with expectations, deal volume surged in the first quarter of 2021, especially compared with the lackluster start to 2020. The number of deals worldwide increased 6%, while the total value of deals roughly doubled to 1.3 trillion, which means activity skewed toward mega-mergers.
Major Deals in Q1 Include:
- Microsoft acquires cloud computing company Nuance, a major player in healthcare enterprise solutions, for $19.7 billion.
- Irish aircraft leasing firm AerCap Holdings buys General Electric’s aircraft leasing unit for $30 billion.
- Canadian Pacific Railway acquires Kansas City Southern for $25 billion.
- In the United Kingdom, the largest acquisition was National Grid’s $19.8 billion proposed takeover of Western Power Distribution, a regional electricity operator.
SPACs Make a Splash
If they weren’t already on your radar, you’ve likely heard about SPACs this year, specifically the major role they’ve played in bringing public funding to private equity.
SPACs, or Special Purpose Acquisition Companies, are publicly funded companies created with the specific purpose of acquiring unlisted ones. Generally, they are sponsored by private equity veterans, who collect funds for a trust, which comprises the SPAC’s only managed assets. These funds must be used for a future acquisition, at the sponsors’ discretion, or be returned to investors with interest by a certain deadline, called the liquidation date. They’ve been called “poor man’s private equity,” providing everyday investors with otherwise exclusive access to private investment.
Though in existence for decades, SPACs have been a major part of the M&A space this year, contributing to what financial analysts are calling the “blank check boom,” since that’s what investors are essentially writing when they fund SPACs.
Along with investors’ attention and dollars, SPACs have also received greater scrutiny in 2021. Warren Buffett recently criticized SPACs, saying they “won’t go on forever”, but are a “killer” right now as they’ve attracted so much cash on Wall Street. The SEC has also taken notice, issuing several statements warning investors to be careful with the investment vehicle and promising to increase regulatory oversight.
The Fundamentals Are Driving M&A
The reason economists project M&A activity to persist through the year is because it’s been driven by solid fundamentals. Specifically, 2021 is seeing a synergy of cheap financing, highly-priced public assets, and a desire across industries to be more competitive in a digitized world.
Pricey Assets, Cheap Financing
The global economic environment is ripe for robust M&A activity. Governments around the world are pursuing fiscal and monetary stimulus to help their economies bounce back, leading to cheap financing. This has led to a high premium for other high-yield assets, such as public equities and real estate. Cheap financing and high prices for other assets are pushing companies and investment banks to pursue aggressive deals.
Strategic Acquisitions: Pandemic Wake-Up Call
Another major factor driving M&A activity, specifically strategic deals, is the unequal impact that the pandemic had on different companies. Many firms are assessing the fact that they were poorly positioned to compete in a more digitized remote world, which was evident over the past year.
As sentiment rises and companies feel more comfortable taking aggressive action, firms want to ensure that they control their future by partnering with companies that cover their weak spots, especially in the tech sector.
Q2 and Beyond
Experts are expecting robust M&A activity for the remainder of the year, reflecting fundamental tailwinds that should continue through 2021. Three sectors likely to enjoy sustained activity throughout the year include finance, industrials, and tech.
Financial firms face pressure to search for yield in new places, as rock-bottom interest rates put pressure on revenues. They’re also facing pressure to invest more in technology, as FinTech companies are gaining market share across segments, from retail investing to payment services. Large players in the financial sector can make up for lost time investing in new technologies by simply buying smaller cutting-edge firms.
Industrials are rebounding from a difficult 2021, and like all firms, companies in this space are taking a hard look at what they need to do to remain competitive in 2021. They’re eyeing deals with firms that can help to drive costs down, either through vertical integration or emerging technologies such as the Internet of Things. Industrials could also see a major boost in capital availability, and thus M&A activity as a result.
Tech Reigns Supreme
The tech sector is in a unique position, buoyed by each factor driving broader M&A activity. Thanks to high stock prices and low-interest rates, tech companies have plenty of capital. Strategic deals such as Microsoft’s recent acquisition of cloud computing company Nuance illustrate a desire for vertical integration and market consolidation.
Its common knowledge that public tech companies have outperformed during the past year; the general consensus is these firms showed they are better positioned to compete in a digital world. Services like cloud computing and delivery apps have taken off thanks to the shift to a remote lifestyle. No firm wants to be caught flat-footed a second time, and boardrooms around the world are wondering how they can better prepare and compete in the future. As discussed regarding the financial and industrial sectors, companies across the economy want to bolster their business with strategic acquisitions in the tech space.
Therefore, we can safely assume that the tech sector, which accounted for the greatest portion of deals at 20% of total volume, will continue to lead the pack throughout the year.
The wild ride of 2020 continues, although the hair-raising falls have given way to exciting highs for investors. M&A activity in Q1 reflects a general risk-on sentiment. It also reflects a desire for companies to bolster weak areas of their business, as revealed by the pandemic. These companies have the access to cheap capital as well as the confidence needed to aggressively pursue mergers and acquisitions.
SPACs were the talk of the town in Q1, seeing meteoric growth since 2019. Whether this trend continues through the rest of the year remains to be seen, as the asset class is now under heavy scrutiny by both business leaders and regulatory bodies. Ultimately, the year will likely be defined by aggressive activity in the technology sector, with companies across industries vying for firms that can keep them competitive in a digital world.