Charting New Horizons

Yes, 2020 was a record year, but companies must now think differently

It’s still too early to tell what a post-pandemic world will look like, but one thing is certain: how companies do business will never be the same. That’s especially true in the mergers and acquisitions (M&A) space, in which executives travelling across continents to look each other in the eye was all in a day’s work. Many companies are still trying to find their way back to growth and many may need to consider portfolio optimization restructuring strategies they hadn’t previously. However, businesses that have done well over the past year may have opportunities for growth that weren’t available to them before the COVID-19 crisis began.

Still, there’s a lot of optimism for the future of M&A. While deals ground to a halt in the early days of the pandemic, they surged significantly over the remainder of 2020, with more than $3 trillion of worldwide transactions by year-end, says Iain Macmillan, managing partner, Global M&A Services Leader, Deloitte UK. Many of those deals came after the various vaccine announcements, with $63 billion of that total made in the week after Pfizer declared it had an effective candidate. “This speaks volumes about the tenacity and adaptability of deal-makers and advisors,” he notes.

As good as those numbers may be—including in the Canadian market, which also saw record transactions last year—it wasn’t business as usual. Company leaders have realized that in order to thrive in the future, they need to alter their approach to M&A. That includes developing multi-dimensional capabilities, digital business models, and stronger supply-chain networks. Much of 2020’s activity centred around what Macmillan calls non-traditional deals. These include cross-sector alliances, co-investments with private equity funds, deals to secure supply chains, and disruptive M&A transactions to acquire innovative startups, he says.

Defensive and offensive strategies required

Going forward, companies must prioritize their choices and develop pathways through crises. According to Catherine Code, Deloitte Canada’s National M&A Leader and Vice Chair, the three phases of crisis emergence in this case are: responding to the shock of the realities of COVID-19; recovering from the pandemic; and figuring out a way to thrive in a new business environment.

The Charting New Horizons recovery-framework report, which Deloitte released in July 2020, helps companies develop new M&A strategies and “bring much-needed clarity of purpose while confronting uncertainties and necessary strategic choices,” Code explains. The paper outlines a number of offensive and defensive strategies, many of which Code says were put into practice over the past year.

For instance, on the defensive side, several companies focused on rapid divestitures (i.e., sales and other forms of disposal) to salvage their value, while others chose to safeguard their markets through consolidation—this was particularly true in the Energy, Resources & Industrials sector, says Code. Still others spent time assessing growth areas and sold off non-core assets.

Some of the companies that went on the offensive spent a lot of energy on accelerating their digital transformations by buying digital assets. Others secured cross-sector alliances—partially between companies in tech and non-tech fields, says Code—to ease entry into new markets and take advantage of undervalued opportunities.

As companies transition from the recover to the thrive mode—most have already gone through the respond phase—leaders will be under pressure to demonstrate long-term benefits of their M&A activities, Code explains. “Industry leadership needs to consider not only the financial impact of companies’ M&A activities but also the environmental and societal impact of their actions, and to ensure that they use data ethically to inspire trust in their stakeholders,” she notes.

An even better year ahead

For 2021, Peter Sozou, Deloitte Canada and Chile’s M&A Advisory Managing Partner, says companies will continue using all kinds of approaches—“there was incredible symmetry between offensive and defensive strategies in 2020,” he notes—and many businesses will look to M&A to accelerate their recoveries.

He expects more companies to deploy a wider range of inorganic-growth strategies, such as the acquisition of disruptive and innovative technologies, partnership and collaborations with peers, co-investments with private-equity and partnership with government. Social and environmental factors will also drive activity in the coming year, echoing Code’s sentiment.

Overall, Sozou, Code, and Macmillan maintain that 2021 could be another record-breaking year for deals. With businesses holding unparalleled amounts of cash, significant levels of dry powder from financial investments, together with low interest rates and strong availability of and access to debt, M&A will likely play a major part in the world’s economic recovery as various stakeholders pursue growth as part of their thrive mode. “We expect 2021 to continue where last year left off,” says Sozou. “But the post-crisis M&A environment is materially different. Linking sustainability with commercial success and building trust across a wide coalition of stakeholders will be the cornerstones of deal-making.”