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M&A Risk in Review 1H, 2021:
A Tale of Sharp Recovery and Resiliency
Few if any dealmakers foresaw the events of 2020. The damage wrought by the abrupt opening and closing of parts of the economy and the human cost of the pandemic has been acutely felt by companies. Investors have had to return to the drawing board to reappraise their strategies and determine the best course of action.
The resilience of the M&A market in the 2H 2020 and 1H 2021 has been nothing short of remarkable. The rebound has come despite the elevated risk outlook, suggesting suggests that demand for M&A insurance will be high. Deal parties will be looking to protect their downside and improve their liquidity by circumventing the use of escrow accounts.
Results of our latest survey of senior executives from corporate development teams, private equity firms and investment banks support this expected trend.
The resilience of the M&A market in the 2H 2020 and 1H 2021 has been nothing short of remarkable. The rebound has come despite the elevated risk outlook, suggesting suggests that demand for M&A insurance will be high. Deal parties will be looking to protect their downside and improve their liquidity by circumventing the use of escrow accounts.
Results of our latest survey of senior executives from corporate development teams, private equity firms and investment banks support this expected trend.
Key Takeaways
M&A 2021
Identifying opportunities
Financing Prospects
Risk and Risk Mitigation
Litigation and Tax Risks
Trends for the year ahead
Key TakeawaysWhat we heard from our survey respondents
Sectors with the most expected M&A activity
Anticipated hotregions for M&A
Critically importantsources of funding
Top risk mitigation strategies
M&A 2021
Sectors with the most expected M&A activity
Last year and the beginning of this year was the most turbulent period in recent memory and our survey reveals that investors are divided on their expectations for 2021.
Soon after the coronavirus outbreak was deemed to be a global pandemic, financial sponsors and strategic acquirers refrained from participating in the deal market as they reassessed the risk environment and their strategies. This resulted in the lowest quarterly performance in a second quarter for more than a decade. The US$372 billion in transactions represented a year-on-year decline of 62%.
However, with the easing of lockdown measures came a sharp rebound in completed deal flow in the third quarter and this recovery carrying over into Q4.
However, with the easing of lockdown measures came a sharp rebound in completed deal flow in the third quarter and this recovery carrying over into Q4.
Over half, 52% believe that dealmaking will stay at similar levels or increase
The remaining respondents feel that the number of M&A deals globally will decrease over the next 12 months, including 34% who think it will decrease by more than 5% compared to the previous 12 months
The remaining respondents feel that the number of M&A deals globally will decrease over the next 12 months, including 34% who think it will decrease by more than 5% compared to the previous 12 months
Ups and downs in dealmaking
The simple fact that target companies’ operational bandwidth is taken up navigating the challenges of today’s environment can make due diligence more burdensome than usual.
Reasons to be optimistic about the months ahead
Reasons to be optimistic about the months ahead
1. What do you think will happen to the number of M&A deals globally over the coming 12 months?
Swift progress has been made in 2021, with the mass roll-out of vaccination quelling the rising pandemic in the US. If successful, this should prompt a return of economic activity in cyclical industries and those most exposed to the effects of the pandemic, such as energy, industrials, travel, leisure and the discretionary consumer goods sectors
A spike in household savings rates in 2020 also bodes well for a return of pent-up consumption. After months of challenging trading and with the unwinding of government support, market dynamics should support opportunistic M&A strategies in a distressed deal
Well-capitalized corporates have an opportunity to make selective strategic acquisitions at attractive prices
Private equity (PE) continues to wield immense firepower, with an estimated US$1.7 trillion in uncalled capital as of July 2020
Reasons to be optimistic about the months ahead
Reasons for caution
WINNERS
Big tech and the wider software and technology industry outperformed all others
TMT has been a strong M&A performer in recent years but extended its lead in 2020
Investors are confident that these fundamentals will remain in place, with 52% of respondents expecting TMT to be one of the most prolific sectors for M&A activity over the next 12 months, followed by Consumer (36%), Pharma, Medical & Biotech (PMB) and Financial Services (32%)
TMT has been a strong M&A performer in recent years but extended its lead in 2020
Investors are confident that these fundamentals will remain in place, with 52% of respondents expecting TMT to be one of the most prolific sectors for M&A activity over the next 12 months, followed by Consumer (36%), Pharma, Medical & Biotech (PMB) and Financial Services (32%)
Identifying opportunities: Sectors and Regions
There were clear winners and losers with sectoral lines more pronounced than ever.
WINNERS
WINNERS
LOSERS
3. Which of the following sectors do you believe will be the most prolific in terms of M&A activity over the next 12 months compared to a year ago?
4. Which of the following sectors do you believe will be the least productive?
Regional Opportunities
APAC (excluding Japan) is viewed by 68% of respondents as being the most attractive region for deals over the next 12 months.
Choose a region to see the findings
5. Which of the following regions do you believe will be the most attractive for M&A over the next 12 months?
APAC
China is the only major economy that is forecast to show positive growth having swiftly contained the COVID-19 pandemic, while a number of South-East Asian countries are on course to show huge growth over the long term.
“Expanding businesses and acquiring assets is easier in the Asia-Pacific region. Although there are strict rules about purchase of property by foreign companies, strategic mergers provide effective solutions for faster development.”
- Managing Director, Japanese Investment Bank
Financing Prospects
The pre-pandemic financing environment already seems like a lifetime ago.
For 2021, it is not wholly surprising to find that more than 76% of respondents expect financing conditions over the next 12 months to be more challenging than they were in 2019, including 46% who expect them to be much more challenging.
The pandemic has altered investors’ risk calculations, making them more selective in what sectors and companies they are willing to back – and at what price.
But financing prospects are looking up. After a punishing first half to 2020, equity and debt financing has eased in 2021 so far on the back of some positive news. The vaccine rollout has proved effective - increasing investor confidence and pointing to a brighter outlook for companies and their financing needs.
Sources of capital
62% of respondents view PE and 44% consider non-bank lenders as the primary candidates, over debt capital markets, traditional bank lenders and cash reserves.
6. How do you expect financing conditions over the next 12 months to compare to conditions in 2019?
7. What do you believe will emerge as the primary sources of financing over the next 12 months?
A risk landscape turned on its head
Putting the COVID-19 pandemic to one side, numerous other downside variables have the potential to impact upon dealmakers and the M&A targets they are seeking out.
A risk landscape turned on its head
Difficulty in accessing deal financing is the primary concern, cited by 38% of respondents as among the top two impediments standing in their way
Risks that impact deal targets
52% of respondents say macroeconomic factors are among the top two risks over the coming 12 months and 36% cite tax as a one of two major risks
10. What are the biggest risks you foresee at potential M&A targets over the coming 12 months?
Risk and Risk Mitigation
A risk landscape turned on its head
Risk mitigation strategies
Due diligence: An even higher priority
Specialized Diligence
Credit Risk
What we heard
Litigation and Tax Risks
Business disruptions caused by the COVID-19 pandemic have elevated risk to investors pursuing M&A. The unpredictability of the external trading environment and its potential impact on a deal target’s employees, key vendors and customers places priority not only on deeper due diligence but also taking out R&W insurance.
Tax Risk
Tax Risk
19. How much more acute is tax risk to deal success now as compared to the recent past?
Unlike other risks that may be more visible, tax risk can be harder to predict since it is at the whim of political policy or other unforeseen circumstances. A forward-looking perspective is vital.
The vast majority, 80%, of respondents say that tax risk is a more serious threat to deal success now than it was in the recent past
The greatest concerns identified in our research include increased rates, 34% and proliferation of anti-abuse rules, 26%
Tax insurance absolves this by transferring this unpredictable risk away from both parties and, like R&W insurance, means vendors can avoid holding capital in escrow, therefore improving their liquidity
“Getting a general idea about the taxation norms in any region is not enough. We have to delve into additional details that are relevant to the industry and uncover discrepancies in the information provided in good time. Use of technology has been vital to streamlining
this process and mitigating risks.”
this process and mitigating risks.”
- U.S. Director of Strategy and Corporate Development
Litigation Risk
Regulatory Headaches
Tax Risk
Trends for the year ahead
The year 2020 has been a defining moment for M&A markets, bookending a decade-plus run. Over this period, there has been a steady uptake in R&W cover and other M&A insurance policies. Despite market challenges, deal activity has demonstrated resilience and, so far, record deal figures have been recorded in 2021.
Resulting in higher relative levels of insurance as investors continue to grow accustomed to this vital risk mitigation and capital efficiency tool
Innovation has become the standard for insurers to find new approaches to protect against risks on the behalf of investors
Innovation has become the standard for insurers to find new approaches to protect against risks on the behalf of investors
The value of Technology and Technology Enablement
Deeper Due Diligence
Intellectual Property Diligence and Insurance to increase with TMT activity
Risk Mitigation through R&W insurance
© Aon plc 2021. All rights reserved.
The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
Any forecasts, estimates, projections, opinions or conclusions included in this document depend on macroeconomic conditions (including the COVID-19 pandemic) over which Aon has no control. They cannot not anticipate possible changes in conditions that could materially impact outcomes.
This document is not intended to constitute advice or encouragement regarding the advisability of any investment or other strategy. Any person or business relying on any statement does so at that person’s or business’s own risk.
Aon is not a law firm nor does it provide legal advice. This article is based solely on Aon’s experience as insurance practitioners. Aon recommends that you consult with your own legal counsel as respects the content of this article.
Subject to availability in applicable state.
The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
Any forecasts, estimates, projections, opinions or conclusions included in this document depend on macroeconomic conditions (including the COVID-19 pandemic) over which Aon has no control. They cannot not anticipate possible changes in conditions that could materially impact outcomes.
This document is not intended to constitute advice or encouragement regarding the advisability of any investment or other strategy. Any person or business relying on any statement does so at that person’s or business’s own risk.
Aon is not a law firm nor does it provide legal advice. This article is based solely on Aon’s experience as insurance practitioners. Aon recommends that you consult with your own legal counsel as respects the content of this article.
Subject to availability in applicable state.