2020 BCG’S M&A Report
— Executive Summary

2019 was the calm before the storm.

  • The number of deals and deal value fell by 5% and 4%, respectively, in 2019 compared with 2018. Deal volume and value were also slightly down compared with the average of the past five years, but they still exceeded the most recent ten-year average. Activity was fueled by 38 megadeals (deals valued at $10 billion or more), compared with 32 in 2018.
  • Deal multiples — enterprise value divided by EBITDA — held steady in 2019: a median of 13.8x, versus 13.7x in 2018. That was lower than the all-time high of 15x set in 2017, but higher than the long-term average of 12x. Acquisition premiums, on average, rose to 29.0% in 2019 (versus 24.1% in 2018).

The pandemic disrupted deal making in 2020.

  • M&A activity started slowly in 2020 and then declined sharply when the pandemic took hold — deal volume in April 2020 was 80% lower than in December 2019. As of mid-September, there had been only 15 megadeals in 2020 (compared to 27 in the same period in 2019). None exceeded $50 billion in value, and only 10 have been announced since mid-March.
  • Across industries, deal volume declined in each sector by 15% to 30% in the first half of 2020 compared with the same period in 2019. However, deal value was actually fairly strong in some sectors, such as financial services, owing to larger deals announced before the onset of the pandemic.
  • For transactions that were not paused or abandoned, the economic crisis swiftly reduced valuation multiples. In the first eight months of 2020, the median deal multiple was 10.5x (versus 13.8x in 2019). Acquisition premiums, in contrast, rose to 30.8% — surpassing the long-term average of 30.7%.

A historical comparison offers reason for cautious optimism.

  • Initially, the drop-off in M&A activity in the current crisis was worse than in the 2008–2009 financial crisis. But a clearly discernible uptick occurred during June through August, as monthly deal activity returned to the lower end of normal levels.
  • Indeed, the uptick in M&A activity that began in June, including the resurgence in megadeals, suggests that the M&A market has turned the corner in recovering from the crisis — although a return of major COVID-19 lockdowns would likely set back the recovery.

However, many dealmakers expect a prolonged period of low volume and depressed deal prices.

  • Among dealmakers surveyed by BCG, nearly two-thirds do not expect to see a full turnaround in deal volume and prices earlier than next year.
  • Even so, survey respondents said that they see attractive opportunities — approximately 75% said that downturns are as good or better environments for value creation through M&A than “normal” times.

Divestitures and distressed deals will increase significantly.

  • Some companies that have taken on high debt burdens in the crisis will want to quickly reduce their debt load by divesting businesses (especially those outside their core or those with a disrupted business model) once M&A activity picks up and valuations rise.
  • The number of distressed deals, in particular, is likely to increase as the downturn continues and companies struggle with high debt loads. This is a concern especially for industries encountering disruptions, whether disruptions caused by the pandemic or ongoing disruptions that predate the crisis.

Private equity and venture capital may quickly recover.

  • The number of private equity (PE) deals in April 2020 was more than 70% lower than in December 2019. PE firms pulled back despite sitting on record amounts of dry powder and facing at least some pressure to invest their committed capital. Looking ahead, we expect PE deal activity to gain more traction toward the end of 2020.
  • A similar dynamic is playing out for venture capital (VC) investments. The number of deals fell significantly in the first half of 2020, while capital invested remained relatively stable. Because VC firms also have record amounts of dry powder, we expect startup funding to rebound quickly.

Bold strategic acquirers will seize opportunities.

  • Our research shows that deals done in a downturn outperform. Examining the 2008–2009 global financial crisis and its aftermath, we found that the sweet spot for large transformational deals occurred as soon as uncertainty subsided. At that point, funding became available and market volatility decreased, but targets were still available at a discount.
  • And being bold clearly helps. Our research has shown that acquiring companies outside of the core business during a downturn helps to position a company for success during the recovery. Examples during the 2008–2009 crisis included PepsiCo’s acquisitions of its two largest bottlers and BlackRock’s acquisition of Barclays Global Investors.

The pandemic may accelerate longer-term trends.

  • The monetary policy measures implemented to combat the economic crisis mean that low interest rates will persist, which supports deal making on the buy side.
  • Digitization and other disruptive technological megatrends — such as advanced analytics, artificial intelligence, automation, and big data — will continue to be very relevant or become even more relevant in the postpandemic world.
  • In some industries, strong companies will continue their efforts to gain market share or reduce overcapacity by engaging in small serial acquisitions and large-scale mergers. In others, the convergence of industry sectors, such as mobility and technology, will continue to promote deal making.
  • The pandemic might contribute to the reversal of globalization, considering that international borders were quickly closed and cross-border supply chains became vulnerable. However, the regionalization of supply chains will not necessarily diminish M&A activity in the short term.
  • Taken together, these developments and trends — short, medium, or longer term — may drive a need for talent and capabilities that promotes not only classic M&A but also alternative deal types such as joint ventures, strategic alliances, and corporate venturing. Indeed, the crisis appears to be accelerating the trend of using such alternative deal types.

Minority deals are becoming more common.

  • The most common alternative deals are those in which the buyer acquires a minority stake. During the past several years, the number of minority deals in total and as a share of all deals increased to about 35%, up from 20% to 25% dating back to 1990. The share of minority deals has peaked in turbulent times, such as 2009 and 2020.
  • In some cases, companies structure deals as minority transactions as part of a stake-building process or as a form of co-ownership or co-investment. Companies also acquire minority stakes in the context of JV&A transactions, such as equity alliances or corporate ventures.

Companies are showing renewed interest in JV&A.

  • Our deal database shows that 2019 saw an all-time high of 11,000 JV&A deals, comprising 1,600 JVs and 9,400 alliances.
  • The recent surge has been driven largely by alliances related to software and IT services, commercial and professional services, and health care equipment and services — indicating that trends such as technological change and the emergence of corporate ecosystems are a motivation. Analyses using Quid, a machine intelligence “discovery tool,” confirmed that global trends are a major factor in promoting the increased use of these deal types.
  • During the past three years, more than half of all JV transactions globally took place in the Asia-Pacific region, while almost two thirds of alliances took place in North America.

Corporate venture capital also fuels alternative deal making.

  • The use of corporate venture capital investments, a type of equity alliance, has been growing steadily over the past ten years, with 2018 marking the peak. In 2009, companies invested $5 billion of corporate venture capital, compared with roughly $85 billion in 2018 and $60 billion in 2019. The number of deals has steadily increased as well.
  • Corporate venture capital has also grown as a share of the overall VC market. In recent years, corporate venture capital has represented 7% to 8% of all VC deals and about one-quarter of the total VC invested.
  • These alliances give established companies access to startups’ creativity, new ways of working, and proficiency with new technologies, while startups receive a reputational boost and gain access to established players’ markets, customers, and industry expertise.

Motivations and goals are expanding.

  • In a recent BCG global survey of dealmakers, approximately 60% of respondents said that they expect alternative deal volumes to rise in the next five years, and another 25% expect them to stay at today’s high level.
  • The two most commonly cited reasons for the growth of alternative deal making are long-term trends — technology (54% of respondents) and business model change (54%). Many respondents (45%) pointed to risk sharing and/or gaining experience as motivations.
  • The findings indicate that the current wave of alternative deals has a much broader range of motivations and goals than previous waves. Rather than addressing specific needs, today’s alternative deals have become an essential and sophisticated component of dealmakers’ arsenals.

Value creation in alternative deals is a coin toss.

  • From the perspective of short-term value creation, investors appear to be increasingly receptive to companies’ use of JV&A. From 1990 through mid-2020, announcement returns trended higher for both JVs and alliances. Longer-term value creation has been more challenging, however. Less than half of all JV&A deals create returns that outperform their industry after one or two years (as measured by relative total shareholder return).
  • Our survey results reinforce the finding that alternative deals have mixed results in terms of value creation. Respondents said that approximately 40% of alternative deals do not achieve their stated financial and/or strategic goals.
  • As the main reasons why alternative deals fail, respondents cited the absence of a clear roadmap for value creation, KPIs, and monitoring mechanisms; the lack of clearly defined and robust governance; and the absence of a clear strategic rationale.
  • Companies with significant experience (at least three alternative deals per year) report that 61% of their deals are successful, whereas inexperienced companies (two or fewer alternative deals per year) report that 58% of their deals are successful.

Successful companies adjust to the intricacies of alternative deals.

  • Companies that succeed with alternative deals typically have experience — they do 3.1 alternative deals, on average, per year. They also do 2.5 classic M&A deals, on average, per year.
  • Almost all successful dealmakers have dedicated M&A teams, and approximately 25% have separate teams or individual staff assigned exclusively to alternative deals.
  • Of the most successful dealmakers, 29% use different processes for alternative deals and classic M&A.
  • Successful companies give their alternative deal teams full control during the execution phase. These teams also provide strong support during the 100-day plan and postmerger integration phases, and even beyond.

To maximize value from alternative deals, companies should follow a set of best practices.

  • Get an early start developing a well-thought-out, long-term plan for alternative deals that advances your overall strategy. Unlike some classic M&A deals, alternative deals do not come out of the blue. Periodically review your plan and stick to it throughout the journey.
  • Do not skimp on due diligence, even though that may be tempting given the seemingly lower financial stakes. A detailed and holistic assessment of the target and the overall deal clearly pays off and is as crucial as it is for classic M&A.
  • Clearly define, negotiate, and formalize postdeal governance before signing, and make governance a top-management task.
  • Use people with explicit experience in alternative deals to negotiate and manage these arrangements, and seek external support, if necessary. A “one size fits all” approach to deal making does not work.
  • Define and implement transparent and feasible incentive schemes for key decision makers in the alternative deal process.

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Joaquim Cardoso @ BCG

Joaquim Cardoso @ BCG


Senior Advisor for Health Care Strategy to BCG — Boston Consulting Group