Pandemic fails to dent appetite for cross-border M&A

19 October, 2021

Dealmakers have charged through the pandemic, completing transactions both at home and in foreign markets despite the challenges posed by COVID-19 and a level of disruption that has forced a rethink of the accepted M&A model. 

Baker Tilly’s annual Cross-border M&A Outlook report, produced in conjunction with M&A intelligence firm Mergermarket, finds a remarkable 95% of dealmakers surveyed were able to finalise cross-border deals in the past year, despite lockdowns and limited travel between countries. 

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More than half of respondents (56%) say COVID-19 has increased their appetite for cross-border M&A deals, which supports the flurry of activity expected throughout the remainder of 2021. 

But the report also shows Dealmakers weighing the increased risks of the lingering pandemic against the need to pursue M&A as a means for growth and transformation within their organisations.  

“The appetite for deals and the positive sentiment for cross-border action is heartening — particularly when you consider that enthusiasm builds on an already very strong first half of 2021,” says Baker Tilly Global Corporate Finance Lead Michael Sonego.  

“This comes despite the well-understood challenges: closed borders, travel restrictions, economic uncertainty and the immediate demands of managing the pandemic. Where deals are strategically important, people make them happen.  

“Even a pandemic hasn’t slowed the interest in M&A.” 

Cross-border M&A interest grows, despite challenges

The Dealmakers report highlights the shift in sentiment in 2021 compared to that seen in the last survey in 2019.  

Before COVID-19, 78% of survey respondents were focused on domestic M&A opportunities. In 2021, that proportion fell to 37% as the collective gaze shifted back to foreign markets. 

Dealmakers say they are looking towards Western Europe (49%) and North America (49%) for cross-border investment opportunities, with respondents preferencing reliable infrastructure, COVID-19 management and attractive target valuations, over riskier options in the developing world.

“Respondents have been attracted to developed economies that have been able to return to some semblance of normality on the back of a successful vaccine rollout,” Mr Sonego says.  

“Conversely, uncertainty around COVID responses, including a slow vaccine response and closed borders, have added an unacceptable additional layer of risk.  

Mr Sonego notes that some economies, particularly in the Asia-Pacific, have struggled with limited vaccine availability. 

“We can see in the reduction of interest in some key markets — even Australasia which has traditionally been seen as a safe haven for investment — that the perception of risk has changed.”   

The first half of 2021 has seen a buoyant acquisitions market based on values, with the highest half-year on record. 

Deal values reached almost US$3 trillion in the first half of 2021 but volumes lagged slightly compared to the first half of 2019.  

The positive outlook among respondents to the latest survey suggests global M&A will remain robust through Q4 and into 2022, as companies adjust to changed conditions.  

Dealmakers are also hoping to see a return of previously stalled deals now that more countries are reopening and a new equilibrium has been reached.  

Adrian Cheow, APAC Corporate Finance Lead and leader of Corporate Finance for Baker Tilly Singapore, says businesses that have adapted and adjusted to the challenges of the past two years are now poised to power through coming months.  

But those that held back waiting for certainty are less well positioned.  

“The push to acquire businesses in response to changing customer behaviour is a red flag for those companies yet to adjust to the new normal,” he says.  

“There’s clear interest among dealmakers in acquiring targets that can strengthen business models by introducing new revenue streams or broaden the opportunities to engage with customers digitally or through new channels.” 

New business models mean new business 

The pandemic has accelerated the trend to doing business by ecommerce and digital connections, according to the survey, meaning deep transformations are necessary, according to 39% of dealmakers, to be well-positioned for the post-pandemic era. 

Survey respondents say it is unlikely that consumer behaviour will revert to old ways even when the pandemic is over.  

As well as improving growth prospects, transformational M&A is seen to provide opportunities to rebuild an organisation around its core customers, enhance operations and reach new customers.  

More than half (55%) say they have already made such acquisitions as part of digital transformation strategies. 

In keeping with this attitude, the survey found more than half of respondents believe digital financial services operators will be a focus of dealmaking soon. They say many fintech start-ups in locations worldwide are reaching maturity, having proved their worth during the pandemic. 

“For many businesses, the pandemic provided the impetus to bring forward digital transformations that had been delayed for years,” says Xavi Mercadé, Chief Executive of Baker Tilly Spain.  

“There has needed to be change in response to changing consumer habits, which can be seen in the rise of ecommerce, as well as the shift to remote or hybrid working, even the willingness to try new brands or experiment with different services.” 

Financial services and technology businesses were the natural winners thanks to that rapid transformation, Mr Mercadé says.  

“Dealmakers see a market for companies that can compete in the neobanking, financial security, digital payment or value exchange space,” he says.  

“It’s an area ripe for disruption with a very large, very new market of customers who will be expanding their spending in this space.” 

In the energy and mining sector, dealmakers say there is a push by companies to sharpen strategies and reassess portfolios in the wake of the oil price slump in 2020.  

There is also strong and growing support for net-zero carbon emissions strategies, leading many corporations to shed non-core assets that may not align with their environmental and sustainability governance, or ESG, frameworks. 

Several respondents noted that non-compliance to ESG parameters could be a dealbreaker with investors, staff, regulators, and financiers increasingly vocal about associating with companies who are not focused on good ESG.  

Mid-market dodges a raft of regulation 

Respondents anticipate that interest in mid-market targets will drive M&A activity in 2021 and beyond. More than half (53%), believe mid-cap sector will account for the bulk of deals.  

Another 43% say the small-cap end of the market will attract most attention. 

The attraction in both sectors lies in fewer regulatory barriers and the better value to be realised through synergies and reliable revenue sources. 

Dealmakers also identified several key challenges in a post-pandemic world.  

Chief among these is an acknowledgement that they face a dynamic and growing list of risks and complexities, some related to the pandemic and others stemming from regulatory changes and increased protectionism in some jurisdictions. 

Almost half of respondents (42%) expect a longer, more complicated due diligence process will be their main challenge.

Most agreed that assessing the underlying economic risks and potential business continuity problems had made the process exponentially more complex and time consuming. As a result, 93% said due diligence was more important now than before the pandemic. 

EMEA Corporate Finance Lead Olivier Willems says the role of due diligence continues to grow in importance for dealmakers, but it is also a more complicated process than pre-pandemic.  

“There’s a tension between the increased focus on due diligence — ranked far more important now than pre-pandemic — and the complexity of undertaking proper due diligence in the current market,” he says.  

“Dealmakers and sellers have had to be creative in how they capture and share information quickly in the absence of physical inspections, and some of that innovation will improve the speed of future deals.” 

Deal financing was also raised as a potential challenge, with 35% concerned about their ability to raise funds to pursue deals.  

“The challenge to secure financing could act as a brake on some activity,” warns Julie Haeflinger, Corporate Finance leader at Baker Tilly France.  

“This is likely to be exacerbated in sectors where investors, banks or private equity are reluctant to engage in assets that have poor records in ESG. It is only going to get harder to find capital if there’s a risk of damage to the financier’s reputation.” 

Despite the concerns, there remains a sense of optimism among three-quarters of respondents that financing conditions will improve through the latter part of 2021 as governments continue vaccine rollouts and better manage the Delta breakout. 

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Meet the experts
Julie Haeflinger
Partner - Director of Operations
Baker Tilly, France
Michael Sonego
Corporate Finance Partner
Pitcher Partner, Australia
Adrian Cheow
Executive Director
Baker Tilly, Singapore
Xavier Mercadé Sanmartí
Baker Tilly, Spain
Olivier Willems
Corporate Finance Partner
Baker Tilly, Belgium

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