Resurgence in M&A is set to continue
M&A activity fell in 2020 due to the pandemic but has bounced back strongly in 2021. This year is turning out to be the second-best in terms of number of deals since the 2007 peak, with a strong revival in cross-Atlantic flows. In the US, deals have been mainly in the tech sector, while European deals have been focused on the cyclical and financial sectors.
However, we are still far from peak levels in terms of deal value as the average size of each deal has fallen this year in both the US and Europe. The average value of a target company stands at 5.5 USD bn. By contrast, between 2014 and 2019, one third of the volume of M&A in Europe was driven by deals each worth more than USD40 bn. No deal of this size has been announced so far this year.
Globally, only half of the total value of deals is funded by cash, with the other half financed totally or partially by share swaps. The same breakdown prevailed before the pandemic. Generally, there is an equity component when deals reach a certain size, with the acquirer leveraging the strength of its own stock price. Current financing conditions strongly support M&A activity since the cash component of deals is usually financed by debt and since interest rates remain low and below pre-pandemic levels.
As we know, an announced deal is not always a done deal. The percentage of M&A deals that fail to go through is higher in Europe than in the US. Although failed European deals have declined from the 2016 peak of almost 40% to around 17%, this is still higher than in the US (10%).
Private equity firms have become more active in listed M&A since 2015, growing to account for around 25% of the value of M&A in Europe today. Private-equity firms tend focus on smaller targets. In 2021, private equity’s average deal target was USD4.8 bn compared to USD5.6 bn for the market overall.
The backlog of deals caused by the pandemic, attractive funding conditions and the increasing influence of private-equity buyers all point to M&A activity remaining fairly strong until year’s end, with little sign of overheating. The resurgence of M&A has been one of our key investment themes this year, with merger arbitrage funds seen as an attractive way to access increased activity.