By Andreas Plattner, Head of Mirabaud Advisors, Switzerland
The European M&A market has been unexpectedly stable throughout the pandemic, both in 2020 and in the months leading up to summer 2021.
While 2020 was far better than expected in terms of deal volumes and numbers, 2021 will benefit even more from the resumption and completion of M&A processes put on hold during 2020, when the pandemic was at its most severe. Year-to-date, total deal value is on track to break records, as we continue to see a very high number of transactions across all deal sizes and industries.
We believe the M&A momentum resulting from the large supply of businesses available for sale is likely to continue for the next 6 to 12 months, as private equity appetite and active debt-capital markets have created a ‘Goldilocks’ scenario for transactions.
Buy-and-build is back
Financial sponsors have remained a key driving force in M&A both in 2020 and 2021. Deal values involving private equity groups, both as buyers and as sellers, across all sizes have been rising in the past two years compared to the years leading up to the pandemic.
We have seen continued fundraising activity from private equity in the last 18 months, which has led to an abundance of dry powder for sponsors to deploy in transactions. Additionally, many fundraisings have been completed faster and ahead of fundraising goals in the last two years.
Valuations that were already at historic levels have not deteriorated significantly during the pandemic, leaving less room for multiple arbitrage strategies. Instead, buy-and-build strategies have moved back into favour for financial sponsors. Often, we have witnessed rapid add-on acquisitions, starting immediately after a private equity buyer has picked up an asset. With many funds nearing their vintage period, private equity exit activity has also fuelled the market for secondary sponsor transactions – a process likely to continue.
Well capitalised corporates
In addition to sponsor-led deals, many corporates remain well capitalised, benefiting from the substantial lending capacity of debt capital markets. Corporate M&A teams are taking this opportunity to tap into the larger pool of available assets.
After facing economic headwinds and uncertainty, corporate buyers stayed rather on the sidelines throughout most of 2020. However, their appetite has now improved and corporate buyers have been involved in some of the largest transactions of 2021. For listed companies, we have seen very positive investor reactions, with stock markets spiking based on the release of M&A related announcements.
Distressed deals surge
In Q1 and Q2 of 2020, we saw a significant surge in distressed M&A deals caused by the first lockdown, acute cash squeezes and uncertainties over the economic environment. Some transactions were the immediate result of the lockdown, as businesses became cash strained. Other businesses that had been struggling prior to the pandemic became insolvent within just a few months. Not surprisingly, trade and tourism have been the industries most affected by the lockdown, and the majority of distressed transactions occurred in these two sectors.
In many other instances, business units marked as non-core by their owners were put up for sale, as corporates gave up waiting for the optimal time to flush out their portfolios. As the pandemic struck and the outlook for low-performing assets deteriorated even more, many corporates hit the block with their underperforming assets before things turned even worse.
SMEs on the rebound
Despite good overall momentum, 2020 was difficult for SME transactions because the lack of visibility affected SMEs more than larger and more diversified businesses.
However, moving into 2021, transactions in the €20m to €100m range have picked-up significantly. Visibility for SMEs has improved, allowing sellers and bidders to form a good view on post-pandemic business. This means bidders are willing to value businesses based on pre-covid levels, assuming 2022 will be mostly back to normal for most entrepreneurs.
Also, with larger deal sizes being very competitive, the trend of sponsors creating funds that better cater for the needs of SMEs – both in terms of deal size and investment horizon – continues. This has created a very attractive environment for SME owners, who, as an alternative to corporate buyers, can access a large universe of financial sponsors that can provide peak valuations, transaction speed and efficiency.