Worldwide mergers and acquisitions (M&A) activity surged to USD1.3 trillion1 in the first quarter – the strongest opening period since records began and the second-largest quarter on record. That came hot on the heels of 2020, when the number of deals more than tripled to 255,2 and corporations accelerated their strategies to gain an advantage, grow more quickly or avoid distressed situations brought on by the pandemic.
At Standard Chartered, we expect this flurry of activity to continue, albeit perhaps with more of an emphasis on core businesses. As the global economy continues to recover from the impact of COVID-19, investors’ minds are focused on environmental, social and governance (ESG) factors, green finance, sustainable infrastructure and the transformational power of digitalisation. Against that backdrop, megadeals will continue to take centre stage.
“Acquisition finance is in the midst of a boom that shows no signs of slowing down,” says David Law, one of Standard Chartered’s Managing Director’s of Leveraged and Acquisition Finance. “Investors are growth-oriented and optimistic about the environment despite the difficulties we’ve all been through in the past 18 months. As the recovery continues, we expect the strength of activity to be sustained with companies looking to M&A to supercharge themselves for the next phase of growth.”
Much M&A activity was put on hold as COVID-19 swept the globe in the first half of 2020. After new ways were found to do deals online, activity accelerated, not just as a way of unlocking growth, but also for survival, as the pandemic reshaped the ways we live and work and tore through many traditional business models.
Buying digital capabilities
Many companies were forced to swiftly pivot or adopt totally new ways of operating, fueling acquisitions of assets and businesses to support them. Activity is being bolstered further by the global economic recovery, with the US making a strong recovery, while China was among the first to emerge and its subsequent growth is proving a big draw.
It’s clear that acquisition finance will continue to be the hottest product in town and digital transformation is a key enabler. The technology that supports remote working, education, shopping and entertainment is now essential, rather than just nice to have.
The speed at which this is happening – fast-forwarded by the pandemic – means that many companies prefer to buy capabilities in, instead of growing them organically. Three-quarters of business leaders surveyed by PwC3 said they plan to allocate more resources to digitalisation and more than 50 per cent said they would allocate more to M&A activity to achieve their priorities.
Asia is at the forefront of the flurry, powered by the technology sector. M&A targeting technology companies have hit a record high in Asia Pacific, according to Dealogic data. Tech deals represented just under a third of the region’s M&A transactions4, reflecting a fundamental change in the way the economy works, as the trend toward online activities accelerates.
Asian tech deals lead the way
Grab Holdings, a large ride-hailing and food delivery firm in Southeast Asia, went public in April 20215, merging with a special purpose acquisition company. Shortly after that, Indonesia’s largest-ever deal6 took place as payments firm Gojek and e-commerce leader Tokopedia merged to create GoTo, a multi-billion dollar tech company spanning online shopping, courier services, ride hailing and food delivery services.
While the companies involved in those deals are focused on enabling the way we live and work now, data centres, the powerhouses of the digital economy, are also high on investor’s watch lists. They have been at the heart of many large deals, with Bain Capital buying into Chindata and the Real Assets consortium acquiring a majority stake in Australia’s AirTrunk.
Data centres and the new economy – high-growth industries that are embracing cutting-edge digital technology – will continue to be a focus for investors as they power M&A activity.
Alternative power sources also outperformed the broader deal-making space last year, according to international law firm White & Case, while PwC identifies the sector as one of its “M&A hotspots”.7
Sentiment remains buoyant
The acquisition boom isn’t playing out consistently across geographies and sectors, since investors are tailoring their strategies to the recovery and focusing on quality. In India, opportunities are fewer, and deal momentum has faltered as the country emerges from the world’s biggest and deadliest COVID-19 outbreak and struggles with its vaccine roll-out.
The spectre of rising inflation and interest rates also threatens to dampen enthusiasm. However, higher rates would be felt less acutely in Asia than in the West because buyouts are typically transacted at lower leverage levels. Overall, sentiment remains buoyant and dealmakers are loosening the shackles on their investment plans.
“Financial sponsors and private market investors are riding trends that were already in train and that have been accelerated by the pandemic,” added Mr Law. “This growth- and opportunity-oriented approach is set to remain, and we see deals continuing to be done all across Asia.” M&A promises to continue its hot trajectory, with acquisition finance fueling deal activity as its capital motor.
This article is based on themes discussed during a panel discussion at Standard Chartered’s recent Global Credit Conference: Opportunities from Disruption. View the recording.