• The release of pent-up demand, coupled with a hospitable financial environment, has made 2021 a record-breaking year for M&A activity, even without counting the fourth quarter. 
  • This powerful demand is reflected in the broader economy. From startups to semiconductors, the supply side is struggling to catch up. 
  • The world continues to grapple with supply chains challenges, as robust demand clashes with production and distribution networks weakened by the pandemic. 
  • In a more digitally connected and physically insular world, software and supply chain resiliency are driving M&A. 

Supply Chains:  Rethinking The Faraway Factory 

Supply chains are strained, costs are going up, and inflation is back. If you’ve turned on the news, cracked open a company filing, or bought a Big Mac in the last few months, you’re likely well aware of these things. 

The world spent the last thirty years intermingling its economic activity to an extent never before seen. When the pandemic hit, we saw that powerful globalization trend reverse sharply, with economic activity retreating to within national borders, cities, and even neighborhoods at its worst points in 2020. Now that the global economy is back to life and demand snaps back, supply chains are having trouble getting back into action. From logistical hurdles to regulatory burden to workers’ fears about returning to work, the production chain isn’t as well-oiled as it was in 2019, but demand is even higher. 

US companies are struggling to keep prices low as inputs, including labor and raw materials, keep getting scarcer and more expensive. Much of that scarcity has to do with robust demand putting pressure on wounded supply chains. GM, GE, and Boeing are among firms warning that input shortages are cutting into fundamental performance. 

Companies have learned a lesson from the pandemic. You can’t count on yesterday’s supply chains to handle tomorrow’s problems. Firms see vertical integration, along with other solutions like near shoring and on-shoring production, as a way to mitigate supply chain risk moving forward. 

Supply chain integration was a driving force behind Dole’s merger with Ireland-based Total Produce. As the company stated,

“Supply chain benefits include increased collaboration across inland freight and logistics in North America, further development of third-party logistics offerings, as well as a strategic approach to the coordination of global sea freight management.”

Expect to see supply chain resiliency cited as a major factor in future M&A activity, particularly vertical deals. 

Semiconductors: Every Cake’s Ingredient

If supply chains have companies considering a vertical buyout, there’s a good chance that semiconductors are the reason why. Semiconductors and computer chips have become a key input for virtually all durable goods, and they’ve been in short supply for some time. Though a worrying issue since 2019, the pandemic accelerated a growing gap between supply and demand. Economists and firms project that this shortage could last into 2023

The semiconductor shortage has affected the sector’s M&A activity in a number of ways. As Accenture recently noted, deal volume is up and median values are getting smaller. There are a couple of factors to explain this trend. Increased regulatory scrutiny of M&A in the sector, driven by antitrust concerns and the national security implications of scarce chips, incentivizes smaller deals which are less likely to attract heavy oversight. Additionally, as a major driver of M&A in the sector is to secure semiconductor supply for companies themselves, there is less need to acquire a company with more capacity than the acquiring firm can absorb. 

While regulatory action cooled M&A activity so far in 2021 after an exceptional year in 2020, many analysts expect this trend to reverse in the coming quarters. We predict an increased concentration of domestic, strategic deals in the sector in the near to medium term, as companies look to shore up their own supply and regulators focus on protecting domestic production. 

Software: Pandemic-Immune, Future-proof

A well-understood consequence of the pandemic was the accelerated digitization of our daily lives. While some changes wrought by the pandemic are reversing, this shift will likely persist and intensify in the years to come. Technology, and especially software companies, proved uniquely resilient to the pandemic, and have become an even more attractive acquisition target than they were before 2020. Reflecting this trend, software M&A activity in 2021 has surged, more than tripling 2019’s total deal value in its first three quarters alone. Much of this activity is coming from legacy financial firms acquiring young FinTech companies, in an effort to compete with digital payment platforms that leave them increasingly out of the loop. 

As companies adjust to a more digital world, expect to see technology companies enjoying a hefty premium for the scalable, data-driven solutions they offer. 

The Pandemic: Sudden Shock, Persistent Trends 

In assessing the global recovery from the pandemic, there is an important distinction to keep in mind: temporary from lasting change. While some of the more difficult parts of life in 2020 have thankfully returned to normal, it’s becoming apparent that COVID accelerated existing trends and brought some changes that aren’t going anywhere. 

Supply chains are likely to be permanently affected; countries and firms will prioritize greater resiliency, predictability, and proximity as they plan logistics and production moving forward. Semiconductors, already scarce in 2019, will not reach abundance overnight—it could take two or more years for the shortage to abate. Companies and countries will also learn from this painful lesson, and through M&A, greater domestic production, or some combination of the two, will try to make sure they’re not caught flatfooted when the next shock comes. 

The most significant change, and least likely to reverse, is the digitization of the economy. Software and technology have led in M&A activity, and that’s unlikely to change. Firms across sectors are trying to pivot toward a more digital business model, with varying levels of success, and the quickest way to achieve this is to externally acquire that knowledge, capital and innovation. 

Ultimately, the firms and stakeholders that realize the permanence of much of the pandemic’s recent change, and aggressively position themselves for tomorrow’s economy, will be better equipped to lead in the future. 

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