Scopes on M&A seem to be optimistic after the intense time post-Brexit and pandemic has brought companies. As mergers appear to be on the rise, business leaders take advantage of the current markets and the security they will get them.
The aftermath of Brexit and the COVID-19 pandemic has the business market booming. Since uncertainties have been lifted following these significant economic matters, business leaders are venturing out and looking to extend their markets, meaning that the mergers and acquisitions (M&A) sector will thrive after being deprived during the first quarter of the covid-19 pandemic in 2020. Moreover, countless leaders believe that the economy will revive significantly and develop more extensive than ever due to macroeconomic indicators like the high consumer price index (CPI) rates and the favourable GDP rates.
Within the PwC 24th Annual Global CEO Survey (2021), an average of 76% of CEOs across the globe expect an economic boost in the next 12 months. This expected economic growth is expected due to the low risk of macroeconomic concerns around geopolitical factors such as tax policies and increased regulatory scrutiny. So, multiple business owners expect vast possibilities in the upcoming year as the technology industry has developed significantly during the pandemic. Due to this, business leaders expect a tighter and more defined method of M&A strategies to support the accelerated growth and reshaping their business models.
This abundance of capital is likely to stay and shape the 2022 M&A landscape, as the business is soaring after the COVID-19 liquidation crisis that many companies faced or missed by a inch. The competitive nature of this market now adorns the sheer growth and leadership strategies that have been adopted since the crisis as cost-cutting, and strategic synergies are around to help fuel businesses long-term growth. Yet, as the prices escalate, these leaders have a more focused mindset due to the pressure of closing deals before inflation takes a hit on their business deals.
Recent M&A Trends
The February 2021 review by EY delved deeper into the results COVID-19 has had upon M&A and business-related matters. This review identified that since COVID-19, many businesses had connected comprehensive strategy and portfolio reviews due to the effects this pandemic has had on their businesses. In addition, these reviews have shown business leaders that investments into international assets, not domestic, were at the top of their keep lists as global assets were UK companies saving grace during the destruction the pandemic brought them.
The Office of National Statistics has revealed that the total number of monthly M&A deals slipped to a low of 58 in May 2020. This notable drop in M&A deals was the root of the global COVID-19 pandemic. However, since then, the activity has improved as in March 2021, 153 M&A deals were made, and it was the highest since March 2020 (196). Therefore, symbolising that M&A is on a steady rise since the desolation the COVID-19 pandemic has had upon businesses. In addition, the value of domestic M&A in the UK was £3.8 billion in the first quarter of 2021, which was a decrease of £5.3 billion on the value recorded in the previous quarter, which counted at £9.1 billion - further confirming that many companies are interested in international, and not domestic, assets.
During the first quarter of 2021, the total value of inward M&A was £6.1 billion, £0.1 billion higher than the 4th quarter (October to December) in 2020. As quarter 1 (January to March) drawn in 383 completed transactions, however, this was still a partial decrease from the previous quarter (484). The Bank of England Agents' summary of Q1 states that "Companies' investment intentions picked up modestly but remained weak" and that "fewer contacts said they were cancelling or postponing investment and more said they were reinstating investment increase efficiency and capacity". However, many business leaders expect a steady incline in M & M&A deals post-Brexit ad pandemic due to the financial security and growth of opportunities it will bring their companies.
Legislations and Policy Changes
The acquisition of private companies is an affair of negotiations between the buyer and seller, and no regulated process is often required. Within non-regulated industries, deals are not subject to input from regulatory bodies such as foreign direct investments (FDI) matters. However, the Companies Act 2006 ensures that private and public companies within the UK comply with moral reasonings whilst dealing with business matters. Whilst the Companies Act does not govern M&A activity, it does alter how companies in the UK are affected by deals.
As Brexit was coming to a close, the transitional period over December 2020 equipt the United Kingdom with a smoother-flowing and less regulated deals system. For instance, there was the halt of going through the European Commission's to approve mergers relating to the UK meeting several monetary thresholds. Therefore, this now signifies that as long as the union satisfies jurisdictional thresholds of the EU Mergers Regulation and the UK's Enterprise Act 2002, the Competition and Markets Authority (CMA) and the European Commission will conduct parallel assessments of the same mergers in their corresponding jurisdictions. The CMA estimated that these changes would result in a 50% increase in merger cases it reviews throughout 2020-2021.
ESG Initiative Take-Over
Environmental, Social and Governance (ESG) factors are being prominently used to distinguish whether or not a business is worth investing in off non-financial factors that may impose material risks or possible growth opportunities. Examples of ESG factors are concerns seen within a company regarding climate change, waste and pollution, plastics, bad relationships with suppliers, employment relations and inclusion and board diversity and structure.
These standard requirements are stated in section 172 of the Companies Act 2006, as 'a director must act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole'. Many individuals would agree that to 'promote the success' of a company would profoundly consider the environmental, social and governance issues or advantages a company withholds.
The ESG screening process is taking far less time to be carried out due to the better technology and data systems that are narrowing the M&A lens and focusing more on the sustainable business elements. Davies states, "We are finding deal teams increasingly using financial metrics to assign values to ESG factors. For example, teams will apply implied prices on (1) greenhouse gas emissions, (2) increased insurance costs from operations in climate-sensitive areas, (3) enhanced demand for goods with positive environmental or social characteristics; and (4) the value of enhanced employee retention and productivity." Thus, the use of ESG helps denote the significant issues that affect environmental problems and financial material loss.
"The direction of travel is clear: ESG issues are taking a more prominent place in the boardroom as a rule, including in the context of acquisitions. The ESG literacy at various levels of companies has undoubtedly increased." - Paul Davies, partner and co-chair of the ESG Task Force at Latham & Watkins
Kamran Khan, head of ESG for the Asia Pacific, highlighted that "A disconnect on ESG could be lethal for your deal" as social factors in the ESG process are the central point of call due to harassment in the workplace claims taking a significant stand out on ESG reports. Other social issues are global supply chains being alerted over modern slavery/human rights risks, which would cause branding issues socially and financially.
Therefore, many M&A professionals are embracing ESG in their deal processes to ensure the most stable investments, as the primary goal within M&A is finding a balance between risk and return factors. In addition, the embracement of ESG makes business decision-making far more straightforward as it delves deeper into common and hidden issues a business back on. This new process regarding M&A and ESG is a period of 'awakening' after the touch hit COVID-19 and post-Brexit brought.
Outlook
To conclude, it is clear that the level of M&A activity that is to come during the second half of 2021 will have pressure upon the deals and allow more complex challenges concerning inflation. But, on the contrary, there is no doubt that the current market will increase in volume as many businesses are venturing out into the technology and innovative sector due to the diversity it will bring to their tables. In addition, although post-Brexit factors have changed the playing field with regulatory bodies and their participation and voice in M&A deals, post-pandemic issues will arise. For instance, the fading out of COVID-19 schemes will come into effect shortly, as we are getting back to normality, which could distress the M&A process. But, on the other hand, there is an awakening shift occurring with the M&A world with regards to the use of ESG on the rise. Therefore, the M&A playbook will go through a stressful period with several potential positive and negative factors possibly taking effect. However, successful dealmakers will indeed be intrigued to know what is to come next.
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