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October 2022 / 5 Min Read

The Business of Mergers and Acquisitions: An Industry Outlook

 

Exploring the trends, challenges, and opportunities for mergers and acquisitions as organizations face major geopolitical and financial headwinds.

Dealmaking in Food, Agribusiness and Beverage, Life Sciences, Financial Institutions and Technology, Media and Communications

Following an intense period of record mergers and acquisitions (M&A) activity in 2021, dealmakers still maintain a healthy pipeline, with cash at unprecedented levels. They are, however, faced with significant headwinds and material risks, including, among others, geopolitical uncertainty driving inflation and interest rate rises, the acceleration of the digital economy, a constantly changing tax landscape, sophisticated cyber threats, heightened scrutiny of environmental, social and governance (ESG) programs and a challenging talent market that puts pressure on people programs and integration.

The food, agribusiness and beverage, life sciences, financial, and technology sectors continue to dominate intense M&A activity. While digitalization creates opportunities for deals in high-growth segments across these sectors, the economic environment also offers the possibility of greater affordability for acquirers. However, across all industries, M&A and other market transactions are complex, time-critical, and highly specialized, and in these highly consolidated industries, dealmakers will need to reassess and adapt their strategies. To drive future growth and optimize the return on investments, it is now imperative to secure risks across multiple business disciplines and functions and, in a tightening environment, rethink the approach to unlocking capital.

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Food, Agribusiness and Beverage (FAB)

A legacy of consolidation means the FAB industry is now dominated by ten key players1 — creating limited opportunities for transformational acquisition. These market constraints are instead pushing private equity and venture capital dealmakers to compete with trade buyers for opportunities to capitalize on high-growth sub-sectors within the industry where expansion is being driven by consumer trends, such as alternative protein products or delivery-based start-ups2.

Life Sciences

The success of bolt-on acquisitions in recent years will continue to drive the appeal of smaller targets and remain the primary strategy within this sector. Strengthened by a global spotlight during the pandemic, the industry benefits from intense investment in research and development (R&D) and a legacy of solid innovation performance. However, rapidly approaching patent expirations pose a risk to the biopharmaceutical market. As the industry struggles to reinvigorate its R&D pipeline, the sector is facing an anticipated $226 billion drop in global sales3.

Financial Institutions (FI)

Following a record year of M&A activity within financial services4, the sector remains highly attractive to dealmakers. Consolidation of the industry after the crisis in 2008 means that growth is increasingly directed toward the acquisition of FinTech and emerging digital asset capabilities, as the industry seeks to drive a digital transformation agenda.

Technology, Media and Communications

Digital services and internet TV came out of the pandemic as big winners, as the world’s reliance on and demand for connectivity and convenience was amplified. It’s a success that translated into a record year of M&A deal value in the global technology, media, and communication sector, with deals reaching $1 trillion in 2021, up 30% from 20205. Driven by the digital revolution's unstoppable momentum, private equity investors' appetite shows no sign of abating as organizations seek new ways to enhance their core capabilities and remain competitive.

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The Challenge of Colliding Forces

On the back of significant growth in 2021, robust M&A activity points to another year of high-performance outcomes — yet, optimum success this year will come to those able to navigate a challenging market, impacted by serious headwinds:

  • Geopolitical uncertainty as a result of the war in Ukraine has induced rising levels of inflation across the globe, with some countries experiencing their highest rates in 40 years6.
  • Interest rate increases, rapid acceleration of the digital economy, and a constantly shifting tax landscape will also create transactional challenges.
  • Organizational threats in the form of sophisticated cyber attacks, heightened scrutiny of ESG programs, and a highly competitive talent market will also put increasing pressure on buyers and sellers alike.

Expecting the Unexpected

When it comes to managing risk and driving deal value, regulation, reputation, and economic uncertainty are having a growing impact on the outcomes of deals. Rising regulatory scrutiny, complex digitized supply chains, squeezed margins, and social media clout all increase the risk of product recalls for businesses in the FAB sector. Similarly, in the life sciences sector, the cost of claims for damage caused by pharmaceuticals or medical devices can expose companies to a high level of risk. Failure to understand and calculate the long-term liability risk and potential claims exposure from food/product safety risks and product recall, especially when buying less mature companies, has led to many costs, including production stoppages, product downgrades, and reputational damage. Likewise, in the tech space, where the target is to acquire intellectual property — assets such as data, source code, and algorithms — the failure to complete detailed assessments of digital performance during the process of valuing a company’s intellectual property can be disastrous if intellectual property rights are challenged or turn out to be worthless.

Solutions for success:

Understand Cyber Risk Exposure — With the rapid digitalization of business processes, cyber security is a critical factor that can be overlooked during buy-side diligence, with dealmakers failing to safeguard the value of transactions by underestimating the threat of cyber risk. To address these risks, buyers must engage with third-party experts and undertake intensive cybersecurity evaluations of their targets to help ensure safe integration. Assessments of digital risk should also consider how robust and compliant a company's data practices are, and also extend to human capital, to understand if a business has the right skills to manage major technology initiatives and integrations.

Articulate the Value of Intellectual Property (IP) — The rising prominence and value of IP means that a business’s value increasingly lies in its intangible assets, such as source codes or algorithms. Quantifying the value of a company’s IP not only helps to strengthen its position in front of potential buyers but can be leveraged by early-stage companies to access innovative financing solutions from insurers, where mainstream banking finance was traditionally unobtainable. Because IP typically retains significant value throughout economic downturns, mapping an asset’s patent landscape and articulating its value can widen access to growth capital, helping businesses to unlock new opportunities and mitigate risk and uncertainty.

The Interconnected Relationship Between People and Profit

For organizations across the globe, the pandemic has moved the needle to a more people-centric approach when it comes to talent strategies and people management. As workforce resilience catapults up the c-suite agenda, employee expectations alter and workforce wellbeing continues to attract public scrutiny, organizations are realizing that the human capital strategies they once relied on no longer meet the complex and shifting demands of employees and operations. A fact not lost on buyers either.

Whether it’s the claims of brutal working hours in the financial industry that have led to reports of employee burnout7, or public accusations against producers that fail to protect their farm workers from physical risks8 — dealmakers are intensifying their due diligence when it comes to asking questions about ethical standards. In today’s climate, reputation has the power to make or break a deal. It's why risks that can harm a company’s reputation, such as employee practices, cyber, and ESG, deserve the same level of scrutiny as commercial, financial, legal, and regulatory due diligence — and the earlier in the M&A process, the better.

When it comes to sellers, it’s equally important that reputations and organizational culture are strengthened, helping firms shore up their employee resilience, engagement and flexibility, while also securing investor trust in their attraction and retention plans. In the battle for talent, M&A activity can also reinvigorate an organization’s talent strategies, providing new opportunities to retain top talent and acquire new skills — helping to create a reenergized leadership team and a more engaged workforce.

Solutions for success:

Focus on Your Human Capital Integration Strategy — The shifting demands and expectations of employees make the integration of people and culture one of the most challenging aspects of a transaction. To maximize deal value and ensure positive post-close outcomes, organizations must complete human capital due diligence to understand the risks and opportunities presented throughout the deal lifecycle. From harmonizing pensions and benefits to securing the right talent and devising engaging employee communications — deal success and value relies on implementing strategic human capital solutions.

Harvesting the Energy of Challenging Headwinds

Across all four sectors, volatility is often the only constant; be it regulatory changes in life sciences, fluctuating commodity costs in the FAB sector, market instability in the financial industry, or the rapid pace of digital evolution. While these conditions have created industry agility, buyers are seeking stability, with volatility driving more activity toward smaller to medium-sized acquisitions and creating new opportunities for more affordable deals.

In life sciences, early-stage biotech assets offer large pharmaceuticals with deep pockets the ability to boost their R&D pipeline9. A downturn in the stock market also makes some of these prospects more attractive, encouraging dealmakers to capitalize on these smaller targets. In the FAB sphere, the e-commerce and online platform markets that achieved rapid growth due to the pandemic are already becoming crowded and subject to consolidation. However, the trend for ethical consumerism that is driving more people to consider the social, economic, and environmental impact of their purchasing decisions is also encouraging organizations to reshape their portfolios by identifying targets that meet these standards.

In the financial sector, as financial volatility exposes distressed institutions, acquisition opportunities are likely to emerge. FinTechs will also remain a key target for banking firms seeking to acquire capabilities and accelerate a digital transformation. However, as interest rates rise and financing becomes more challenging, investors need to unlock the value of innovation, targeting products that offer them enhanced digital capabilities that will improve customer engagement and experience. The same is true in the global technology, media, and communication sector, where dealmakers should focus on technology-enabled transformations that help organizations to meet customer demands more efficiently by driving down cost, speeding up delivery, and increasing automation. With digitally-enabled business models expected to account for 70 percent of new value created in the global economy10, emerging trends within cryptocurrency, disruptive technologies, and artificial intelligence (AI) offer transformative opportunities to revolutionize operations and accelerate innovation.

Solutions for success:

Balance sheet optimization and capital efficiency — Tax insurance and other forms of contingent risk insurance are some of the evolving M&A strategies being implemented in response to emerging trends and changing market needs. Restructurings present considerable tax consequences for businesses that tie up balance sheets. Similarly, the repatriation of money involved in complex cross-border deals creates uncertainty and risk. In the face of challenging global economics, dealmakers can optimize balance sheets by utilizing an extensive range of transaction liability insurance products that help them to transfer risk and leverage access to cheaper insurance capital.

A Holistic Approach to Dealmaking

As transactions become more complex, the frenzy of activity seen in 2021 is unlikely to be replicated on the same scale by the close of 2022 — but the market is still ripe for dealmaking, and deals are abundant for those prepared to rethink their approach.

Against the force of significant headwinds, the nature and breadth of transaction risks are changing. Savvy dealmakers looking to exploit emerging trends and opportunities are employing more holistic strategies, securing risks across multiple business disciplines and functions. Beyond the typical due diligence applied to legal and financial aspects of a deal, many are protecting their value and mitigating risks by expanding due diligence to cover specialties like credit, insurance, people and HR, retirement liabilities, cyber, intellectual property, and ESG.

With a more holistic approach to M&A activity, dealmakers in 2022 and 2023 can realize more positive results at every deal stage — from securing investments to maximizing deal value and driving transaction success.

1 These 10 companies make a lot of the food we buy. Here’s how we made them better, Oxfam, December 2014
2 Top 7 food and beverage industry trends 2022, Nielsen, January 2022
3 World Preview 2021 — Outlook to 2026, Evaluate Pharma, 14th Edition July 2021
4 Sponsors brave the storm amid drop in financial services M&A, Unquote, July 2022
5 Mergers and Acquisitions in Tech, Media, and Telecom: An Analysis of M&A Activity in 2021, Business Wire, March 2022
6 US makes most aggressive interest rate hike since 1994, World Economic Forum, June 2022
7 Long hours and burnout — Why financial institutions must address mental health to manage risk and build resilience, Aon, 2021
8 Working conditions in the agriculture industry, FAIRR, April 2019
9 The ‘innovation gap’ haunts Big Pharma, and the race is on for the next blockbusters, PharmaVoice, April 2022
10 Shaping the Future of Digital Economy and New Value Creation, World Economic Forum

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