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Against all odds: US M&A 2020

What's inside

US deal activity held up remarkably well in the face of unprecedented uncertainty in 2020, with total deal value in H2 surpassing the previous year


Global Head of M&A

After the initial shock of the pandemic, M&A activity rebounded significantly in H2. Nevertheless, challenges remain—despite low interest rates and strong stock prices

The past year has been an exceptionally challenging one for societies and economies globally, and many companies were hit hard by COVID-19 lockdowns and travel restrictions.

The huge uncertainty that gripped capital markets early in the pandemic put equities into sharp decline and dealmaking largely on hold as strategic buyers and private equity (PE) firms turned inwards to support existing portfolios. The challenges posed by remote due diligence and uncertainty around valuations provided further reasons for market participants to hold back from transacting.

After this initial period of disruption, however, deal activity rebounded strongly, with total value in H2 significantly higher than the same period in 2019. Buyers assessed COVID-19 business risks, PE owners provided portfolio companies with the necessary support where required and proceeded to look outwards for opportunities to improve companies through acquisitions.

Low interest rates and extensive government support for the economy have helped to revive deal activity. Resilient companies in industries that fared relatively well through lockdowns—such as TMT, food and beverage, and healthcare—have been able to take advantage of high levels of cash and strong stock prices to execute acquisitions.

The rise in deal activity in the second half obscures a bifurcated market, however. Even as activity at the top end of the market exceeded pre-pandemic levels, M&A in the middle-market remained muted, likely due to greater uncertainty around valuations.

Our overall outlook for the next 12 months is cautiously optimistic. A series of successful clinical trials have led to vaccine rollouts, providing a major boost to close the year. And stock markets have looked beyond the pandemic to crest new highs.

A more stable outlook could spark a resurgence of middle-market deals, as well as continue to encourage deal activity among larger firms.

After a difficult period, there is reason for optimism that conditions in 2021 will support the momentum in M&A markets that started to build in the final quarter of 2020.

US dealmaking robust despite COVID-19

US M&A activity fell precipitously in the first half of the year but picked up again in H2, especially at the upper end of the market

US dealmaking robust despite COVID-19

Private equity stands its ground in 2020

US buyout activity at the top end of the market dropped significantly but exit value held up in 2020

Private equity stands its ground in 2020

Sector watch

Sector overview: TMT and healthcare top the charts

The TMT sector was buoyed by global spikes in demand as the world shifted toward virtual interactions in every walk of life

Sector overview: TMT and healthcare top the charts

Oil & gas dealmaking hit hard by pandemic

Deal activity in the oil & gas sector was severely impacted by the COVID-19 pandemic, as commodities prices plummeted

Oil & gas dealmaking hit hard by pandemic

Technology megadeals shine, while mid-market activity slumps

Businesses and consumers have relied on technology more than ever through the course of the pandemic, supporting strong dealmaking at the top end of the market

Technology megadeals shine, while mid-market activity slumps

Healthcare M&A activity heats up in H2

M&A value in the healthcare sector (incorporating pharma, medical and biotech) stayed relatively robust in 2020, even without the kind of blockbuster deals the sector had become accustomed to seeing in recent years

Healthcare M&A activity heats up in H2

Consumer M&A strong despite COVID

Total M&A value in the consumer sector has dropped only 1 percent year-on-year thanks to several significant transactions in the food industry.

Consumer M&A strong despite COVID

Real estate M&A tumbles, despite bright spots in healthcare and logistics

Real estate portfolios exposed to hospitality and retail assets have struggled through COVID-19 lockdown periods, but healthcare and logistics investments have performed strongly

Real estate M&A tumbles, despite bright spots in healthcare and logistics

Decisions from Delaware

Notable decisions from Delaware courts

2020 saw several decisions from the Delaware courts that will affect M&A dealmaking. We focus on four that may prove especially consequential

Notable decisions from Delaware courts


Five trends to look out for in 2021

The past year has been tumultuous for M&A activity, but with a COVID-19 vaccine rollout underway and pent-up demand among PE firms, the fundamentals are in place for a busy year in 2021

Five trends to look out for in 2021
US dealmaking robust despite COVID-19

US dealmaking robust despite COVID-19

US M&A activity fell precipitously in the first half of the year but picked up again in H2, especially at the upper end of the market

14 min read

US M&A activity proved remarkably resilient through 2020, despite the historic impact of the COVID-19 pandemic. Although total value dropped 21 percent year-on-year to US$1.26 trillion and volume fell 15 percent over the same period, the lion's share of the decrease in activity took place in the first half, and total value in the second actually topped pre-pandemic levels.

Activity began to slow down in March, and total US deal value in the first half came to US$295.4 billion—70 percent below the same period in 2019—while volume slid 22 percent to 2,486 transactions.

The second half, however, saw a major uptick in deal activity, with total value surpassing that of H2 2019. Deal value reached US$965.3 billion in H2 2020, a 62 percent increase compared to H2 2019, even as H2 volume fell 8 percent to 2,787.

All but one of the ten largest deals of the year were announced in H2

Megadeals shine in H2

Much of the rebound in M&A in the second half was due to a return in confidence among larger players. Corporates that saw revenues soar during the lockdown period and identified opportunities to strengthen their supply chains and digital infrastructure returned to deals, as did PE buyers eager to deploy the US$1.7 trillion of dry powder sitting in their war chests.

Forty-three megadeals (those valued at US$5 billion or more) were announced in H2, more than double the number announced (21) in the same period in 2019. The total value of these megadeals, US$502.4 billion, was 94 percent higher in H2 2020 compared to 2019. All but one of the ten largest deals of the year were announced in H2, with the largest announced in mid-December—the US$38.7 billion bid by AstraZeneca for rare disease specialist Alexion Pharmaceuticals.

Activity involving large deals (US$1 billion to US$4.99 billion) also rose year-on-year by both volume and value. There were 138 such transactions in H2 2020, worth US$296.1 billion, representing a 53 percent increase in terms of volume and a 63 percent rise in value over the same period in 2019. 

SPACs soar
By Michael Deyong, Joel Rubinstein, Tali Sealman

SPACs, or special purpose acquisition companies, are shell companies that list on stock markets and then proceed to acquire M&A targets. Approximately 248 of these vehicles were listed in the US in 2020, raising more than US$80 billion, compared to 59 listings raising US$13.5 billion the previous year, according to Dealogic.

Highly respected sponsors, including billionaire investor Bill Ackman, who led a record US$4 billion SPAC IPO through his hedge fund, Pershing Square, and PE firms TPG Capital and Gores Group, have helped to underpin the structure's credibility among investors. Many sponsors have been encouraged by SPAC structures known as "promotes." These incentives grant sponsors a 20 percent slice of a SPAC's equity when a deal is struck.

For business owners and management teams, SPACs provide an alternative to the vanilla IPO process, allowing them to align with experienced sponsors and lock in fixed valuations at the beginning of the process when the definitive agreement is signed. SPACs can also be structured to offer earn-out provisions if markets do not meet target valuation expectations when a deal closes, allowing targets to receive greater compensation at a later date.

Many SPAC acquisitions are also backed by private equity firms, which offer additional cash for deals in exchange for equity in the form of PIPE (private investment in public equity) investments. Locking in a PIPE investment at the time of signing demonstrates a commitment from an institutional investor, similar to the way anchor investors in IPOs can act as an endorsement by large, reputable asset managers, assuaging any potential concerns retail investors may have about a new stock.

So far, SPACs appear to have matched investor expectations. The Diamond Eagle Acquisition Corp SPAC is a standout example. Backed by Hollywood veterans Harry Sloan and Jeff Sagansky, the SPAC has seen its share price climb more than six-fold after executing a merger with digital betting companies DraftKings and SBTech.

The challenge facing other SPACs in 2021 will be to replicate this kind of performance and find quality assets in a highly competitive market.

Middle-market firms have always been more difficult to value, and with so much uncertainty in 2020, it is understandable that deal activity in this segment has been muted

Middle-market falters

The COVID-19 pandemic accelerated a trend that saw muted dealmaking in the middle-market (deals worth between US$5 million and US$999 million) even as activity at the top end of the market increased.

There were 842 middle-market transactions in the second half of 2020, worth a total of US$166.9 billion—a 16 percent drop in volume and a 7 percent increase in value, compared to H2 2019. 

Middle-market firms have always been more difficult to value, and with so much uncertainty in 2020, it is understandable that deal activity in this segment has been muted.

Domestic dominance

Another continuing trend is the dominance of the domestic market in US M&A. Since 2018, domestic deals have accounted for about 80 percent of the total value each year, as trade tensions between the US and China rose and the Committee on Foreign Investment in the United States increased its scrutiny of inbound investments. COVID-related concerns related to trade and travel heightened the trend.

In total, there were 4,408 domestic deals in 2020, worth US$1 trillion, making up 80 percent of value and 84 percent of volume. The strength of the domestic market was even more pronounced at the top end: Eight of the top ten deals of the year were domestic. AstraZeneca's bid for Alexion and Siemens Healthineers's acquisition of Varian Medical Systems were the only two deals in the top ten with foreign bidders.

On the other hand, challenges to cross-border dealmaking did not seem to have fazed US-based bidders looking abroad. Although the number of deals fell 17 percent, outbound deal value rose 12 percent compared to 2019 to US$372.6 billion in 2020.

Positive signs

In December, the Federal Reserve announced it expected US GDP to contract 2.4 percent in 2020. Yet there is reason for optimism about the macroeconomic climate: The Fed expects GDP to grow at a rate of 4.2 percent in 2021.

In addition, the S&P 500 and Dow Jones both hit all-time highs in H2 2020 on the back of positive vaccine news, which provided M&A markets with a further boost to close the year, despite a second wave of COVID-19 infections.

Pent-up demand drove a flurry of transactions in the second half of the year, but challenges remain. The pandemic's impact on businesses has created valuation gaps that have proved difficult to bridge. COVID-19 obviously remains a serious risk, despite the incredible progress made on developing and rolling out vaccines. Although the unemployment rate has fallen since its April high, it is still above the rate in February, before the pandemic became a major concern in the US. And there is a lot of uncertainty about the policy direction of the Biden administration, especially regarding the possibility of tax cuts being rolled back.

Yet there are also many tailwinds in the market. Stock markets are at an all-time high, interest rates remain low, GDP is poised for growth, and M&A has gained momentum throughout H2 and heading into 2021. Thus, the outlook for M&A in the next 12 months is bright.

CFIUS stays busy despite drop in inbound activity in 2020
By Farhad Jalinous, Karalyn Mildorf, Keith Schomig

Although inbound deal activity into the US fell in 2020 (dropping 22 percent compared to 2019), the Committee on Foreign Investment in the United States (CFIUS) stayed very busy. The sustained level of activity for CFIUS, which screens foreign direct investment (FDI) into the US on national security grounds, has not been unexpected.

In February, the Foreign Investment Risk Review Modernization Act (FIRRMA) came into full effect, expanding CFIUS's jurisdiction to include certain non-controlling but non-passive investments in US businesses involved with critical technologies, critical infrastructure or sensitive personal data, as well as certain real estate transactions. This broadening of CFIUS's reach, as well as additional FIRRMA requirements that make certain filings mandatory, have all contributed to the high number of submissions. CFIUS has also been more aggressively pursuing non-notified transactions, including for deals that closed years ago.

Declaration filing option streamlines the CFIUS process for some deals

FIRRMA also introduced a new short-form declaration filing option. Unlike full notices, declarations do not require any filing fees and the assessment is completed in only 30 calendar days (though CFIUS can request a full notice). By contrast, the review process for full notices typically takes up to 3 to 5 months and now requires filing fees based on the value of the transaction.

The declaration option can offer a pragmatic solution for parties with more benign transactions, allowing them to complete the CFIUS process at lower costs and in a shorter timeframe. The declaration process also helps CFIUS to better manage a larger number of cases by enabling it to address more straightforward transactions quickly and focusing greater resources on more complex deals. In deciding whether to file via a notice or declaration, parties should assess the likely risk profile of the transaction to determine which filing option makes the most sense.

Geopolitical tensions

Even prior to FIRRMA's full implementation, CFIUS had become increasingly active and influential in M&A. Between full notices and declarations under a pilot program, in 2019 CFIUS reviewed 325 filings. This marked a five-fold increase on CFIUS activity levels from a decade ago.

Although US relations with China were especially strained during the Trump administration, national security concerns regarding China have been bipartisan, and tensions between the two countries are expected to continue under the Biden administration. Thus, concerns related to China will continue to play an important role in CFIUS reviews—including in certain transactions that do not involve a Chinese investor. Notably, however, the decrease in Chinese investment into the US has correlated with fewer deals being stopped by CFIUS. Overall, with the full implementation of FIRRMA and heightened focus on national security considerations for FDI, CFIUS is expected to continue to play an important role in cross-border deal dynamics.

Hart-Scott-Rodino filings surge in Q4
By Rebecca Farrington, George Paul

In a clear sign that despite the serious impact of the COVID-19 pandemic on the US economy, the M&A market is alive and well, November 2020 saw an exceptionally high number of Hart-Scott- Rodino (HSR) submissions—pre-merger filings to the Federal Trade Commission (FTC) and Department of Justice (DOJ).

According to FTC figures, HSR filings figures for November— historically the busiest month for filings—came in at 424. This was 102 percent up on the 209 filings in November 2019 and higher than the previous record monthly total of 254. December also showed strong activity, with 192 filings versus 2019's 172.

Unless an exemption applies, HSR filings are required for all deals worth US$94 million or more, where one party has assets or sales of at least US$188 million and the other party has assets or sales of at least US$18.8 million. Filings are typically made once deals have already been announced and made public. HSR filings, therefore, catch a large portion of activity in the market and serve as a key indicator of the strength of M&A appetite and its direction of travel.

Sign of the times

The surge in November numbers has not been enough to balance out the drop in annual figures, however, which declined sharply in March, April and May as COVID-19 lockdowns and uncertainty saw US M&A markets all but shut down. HSR filings fell from 2,089 between January and November 2019 to 1,831 over the same period in 2020.

But although overall annual figures are down year-on-year, the record number of submissions in the month to November reveals a strong recovery in M&A activity in the second half of the year as transactions that were put on hold in the spring came back to market, and pent-up demand for deals continued to build.

The November filing figures will provide dealmakers with reason for optimism going into 2021. Even if monthly figures in the coming year do not match the record number observed in November, the steady increase in HSR filings since June 2020 shows momentum building and confidence growing in US M&A markets going into the new year.

Management retention and employee health are top priority
By Tal Marnin, Henrik Patel, Victoria Rosamond

Unpredictable stock markets have increased the challenges of retaining key senior managers, making it difficult for investors and target companies to agree on stock options, earn-outs and bonuses. Moreover, employee health, safety and diversity policies have been thrust to center stage in 2020 due to the pandemic and the Black Lives Matter movement.

With respect to key management and employee retention, companies and deal investors have had to develop creative incentive schemes to keep talent onboard through the COVID-19 dislocation period.

With liquidity a priority, particularly through lockdowns in Q2, a large number of CEOs and boards accepted pay cuts in order to conserve cash. According to research from Aon that tracked 8-K SEC filings following the first round of lockdowns in Q1 and Q2 2020, 364 companies in the Russell 3000 (approximately 18 percent) reported adjustments to CEO or board pay.

One approach to managing income lost from salary cuts has been to replace wages with equity awards. This has helped to retain talent and get the management teams of target companies comfortable in M&A situations. 

This desire among management teams and vendors to lock in attractive returns and incentives despite volatile markets has been one of the drivers behind the explosive growth of SPACs (see SPACs sidebar, page 4).

Unlike traditional IPOs, vendors that opt for a listing via a SPAC are able to transact at a fixed value from the beginning of the process and secure minimum cash payouts upfront. SPACs can also offer additional earn-out options if valuation expectations are not initially met, allowing vendors and management to receive additional payouts when share price targets are cleared.

Dealmakers, however, haven't only focused on senior management packages in M&A negotiations. The pandemic has also highlighted the risks to supply chains and business continuity when wider employee health and safety is at risk.

 White & Case analysis of the SEC filings of the 50 largest companies by revenue in the Fortune 100 in the year to August showed that 76 percent of these businesses had included disclosures related to employee health and safety. Nearly all of these disclosures referred to COVID-19 and the steps taken to maintain employee welfare and business continuity.

This emphasis on reporting on employee health and safety has filtered into M&A processes, with buyers paying close attention to the steps target companies have taken to protect staff and sustain operations and productivity.

Shortcomings in these areas should now raise red flags and can put deal processes at risk.

Environmental and social issues come to the fore in 2020
By Maia Gez, Seth Kerschner

Through the course of 2020, environmental, social and governance (ESG) factors have become increasingly pertinent for M&A investors.

The coronavirus pandemic, the Black Lives Matter movement, and phenomena such as the California wildfires have highlighted how businesses are affected by and affect public health, civil society and the environment. Thus, ESG is higher up the corporate and PE agenda than ever, and is becoming more and more influential when it comes to M&A.

ESG stock market indices, including the MSCI World ESG Leaders index and the Russell FTSE4Good Developed 100 index have both outpaced other generalist stock market indices, and, according to Morningstar, ESG funds experienced record inflows through Q1 2020 as the pandemic took hold and spread.

The impact of ESG on M&A has been particularly visible in sectors like energy, mining and utilities where companies in carbon-intensive industries have proactively turned to M&A to reposition in the face of the ongoing transition to cleaner energy sources.

Dominion Energy's US$4 billion sale of its natural gas transmission and storage assets to Berkshire Hathaway, for example, formed part of its strategy to transition to a pure-play clean energy utility.

Investors are also exerting their influence on corporates and PE firms, which is having an effect on the deals buyers are willing to pursue. ESG was already a focus area for investors prior to the pandemic, with Larry Fink, the CEO of BlackRock, the world's largest fund manager, announcing plans to scale up sustainable assets from US$90 billion currently to US$1 trillion over the next decade. COVID-19 has further underscored ESG's importance and accelerated its implementation.

There is also a growing recognition that sound ESG and sustainable long-term financial performance are mutually reinforcing. A study by Tensie Whelan, a professor for business and society at NYU's Leonard N. Stern School of Business, for example, found that companies that embed ESG in business strategy achieve better returns than those that don't. They also did better on customer retention and business continuity.

As a result, it is increasingly common for dealmakers to filter for sound ESG practice when assessing targets and include ESG in their due diligence processes.

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