2020 was a volatile year for M&A, with an almost complete halt in deal activity in the early months of the Covid-19 crisis and a rebound in the second half of the year, when deal value rose by more than 30% in the third and fourth quarters. Bain & Company's new survey of nearly 300 M&A practitioners shows that appetite for M&A remains robust, with about half of respondents expecting higher M&A activity in their industries in 2021. The survey also shows that M&A will continue to be a key strategic pillar for business, with practitioners expecting M&A to contribute to 45% of their growth over the next three years, compared to about 30% over the past three years. These are among the findings of Bain & Company's Global M&A Report 2021.

"2021 promises to be a dynamic year for M&A," said Andrei Vorobyov, a partner at Bain & Company and a leader of the firm's Mergers & Acquisitions practice.  "Executives expect an uptick in M&A activity and that M&A will become even more important for achieving growth. To compete in this increasingly disruptive environment, M&A practitioners need to rethink their M&A strategy and roadmap; broaden their M&A options to include corporate venture capital, partnerships and minority stakes; and further digitalize their M&A process."

The surprising increase in deal multiples

In addition to an unexpected rebound, 2020 brought a number of surprises to M&A practitioners, including strong deal valuations across many industries. With the pandemic taking its toll on the economy, it was natural to assume deal valuations would weaken, leading to distressed M&A. Indeed, that is what transpired following the global financial crisis, when deal multiples dropped by about 30% over two years.

But in the unpredictable year of 2020, the opposite happened. Globally, median enterprise value to earnings before interest, taxes, depreciation, and amortization deal multiples increased to 14 times from 13 times in 2019, underpinned by fast-growing industries, such as technology, telecommunications, digital media and pharmaceuticals. Unprecedented government stimulus, combined with continuing low interest rates, a spike in household savings rates, record PE dry powder and accessible debt capital markets, has contributed to sustained asset prices.

A growing urgency to divest

While Covid-19 placed unprecedented demands on management bandwidth, divestiture activity went to the back burner. Divestiture volume was down 15% in 2020, and value dropped by 21%. However, the crisis has added an urgency to divest as companies need to divert their scarce resources to the best opportunities amid increasing industry disruption. Roughly 40% of the practitioners Bain surveyed expect a rise in divestitures over the next 12 months, with the industries hardest hit during the pandemic, such as retail, energy and hospitality, likely to see the highest level of divestiture activity.

Bain's research indicates willing buy-side demand for divested assets too. About 62% of surveyed M&A practitioners expect more interest in acquiring carved-out assets in their industries over the next 12 months. Meanwhile, private equity (PE) interest in carved-out assets is expected to remain high in the year ahead, with general partners under pressure to continue to put dry powder to use. Across industries, 30% of respondents anticipate PE to increase its interest in buying divested assets, with the biggest anticipated rise in advanced manufacturing.

A continuous appetite for growth and new capability assets

A few years ago, Bain identified an increase in the share of scope deals aimed at helping companies expand into fast-growing markets or gain new, mostly tech and digital, capabilities. This trend continued in 2020, with scope deals further increasing volume share to 56% of all deals more than $1 billion, compared with 41% in 2015.

Technology, consumer products and healthcare stand out with the highest share of scope deals. The need for new critical capabilities was at the heart of many recent scope deals. For example, consumers' growing demand for direct delivery drove Target's acquisition of Deliv, Nestlé's acquisition of Freshly and Ahold Delhaize's acquisition of FreshDirect.

Scale M&A continues to be relevant as well, especially in industries that are watching the pandemic hasten the disruption of their business models. Traditional media and retail will experience more consolidation as scale becomes increasingly necessary to compete with and outinvest digital competitors.

In banking and telecommunications, consolidation is also being encouraged by regulator support. In banking, the US and Europe are already witnessing the start of domestic consolidation, with such deals as PNC and BBVA in the US, Bankia and Caixa in Spain, and Intesa Sanpaolo and UBI in Italy.

Increasingly local supply chains

Covid-19 accelerated a number of M&A trends that previously felt years away. Among them, the decline in cross-regional M&A in favor of local or regional deals. The rising scrutiny on cross-border deals and ongoing US-China trade tensions have already been slowing down cross-regional trade for a few years. This trend is decisively accelerated by supply chain concerns exposed by the Covid-19 crisis. About 60% of Bain's survey respondents said supply chain localization will be a significant factor in evaluating deals going forward.

As an indication of this localization, the number of Asian outbound deals into the Americas and Europe fell by 29% year over year in 2020. With overall deal value down only 2.5%, Greater China acquirers directed 93% of their deal spending toward domestic companies, with only around 5% going to deals in the Americas and Europe, the Middle East and Africa. This represents a sharp drop from around 11% in 2019 and roughly 25% in 2016, the peak of Chinese outbound M&A.

Virtual diligences and integrations

In addition to becoming increasingly local, deals rapidly moved online in 2020. Corporate M&A and PE teams have found themselves quickly adapting to the world of virtual due diligence, deal closing and integration. Yet, about 70% of M&A practitioners Bain surveyed said that diligence in 2020 was challenging.

2020 will also be remembered as the year ESG assumed a prominent place among M&A criteria, requiring the extension of target screening, the development of new diligence capabilities and the use of new data sources.

Industry perspectives

More so than in the past, the external environment in each particular industry is setting the boundaries for how much M&A companies can do. Technology, media and telecommunications all saw strong market capitalization increases last year, while energy and financial services saw the biggest declines. Below are some of the most notable industry-specific trends Bain is watching.

Consumer products: It would be natural to blame the pandemic for the drop in consumer products deal value last year, but it represents a continuation of trends that have been playing out over the past three to five years. Bain's research shows the industry may be due for an uptick in deals—45% of surveyed consumer products M&A practitioners expect deals to increase over the next 12 months. The most profound change in consumer products M&A is in deal mix.

Scope and capability deals now make up 60% of deals greater than $1 billion. Deal activity for insurgent brands—those that significantly outpace category growth while simultaneously reaching minimum scale—has grown twofold to threefold since 2015. These trends point to a more fundamental change in M&A strategy as the consumer products industry reacts to low growth and historic disruption in consumer needs, channel shifts and competition.

Retail: The Covid-19 pandemic hastened the shift to e-commerce, increasing the importance of M&A in the retail industry. The retail M&A practitioners Bain surveyed expect M&A to contribute almost 60% to top-line growth over the next three years compared to around 35% over the past three years, one of the highest jumps among all industries surveyed. Activity will intensify for both scale and scope deals.

Markets are looking for scale, growth and digital performance. Nowhere is this seen more clearly than in the grocery sector. Increasingly, grocers are taking creative new approaches to deals. Some are buying or partnering to integrate supply chains, while others are partnering to access new capabilities and technology and to accelerate growth of new channels.

Technology: Technology M&A roared back from an almost standstill in the second quarter of 2020 to hit record activity in deal volumes and value in the second half of the year. Tech M&A continued to trend toward more growth- and capability-oriented scope deals, representing 81% of industry deals in 2020, far more than other industries. Most significant is the rising interest of nontechnology investors in the tech space, which now account for nearly three-quarters of deals in the technology sector, up from about 60% a decade ago.

Media: In media, Bain expects a flurry of new deals over the next two to three years, with the majority of growth in media coming from video streaming. Bain's new research shows that there will only be a few winners once the dust settles in this land grab moment. Our data shows that streaming grew quickly in the first half of 2020, but that consumer demand caps at three to four subscriptions. The report also digs into the unique nuances of integrating media companies, especially virtually, given the criticality of creative talent in the industry.

Telecommunications: Following a steep drop the previous year, telecommunications deal value grew by about 50% in 2020. The industry also witnessed a changing deal mix. Despite fears that further industry consolidation would be quashed by regulators, scale M&A rebounded. Meanwhile, infrastructure M&A, a type of deal that's unique to telecommunications, continued apace as companies sought to monetize infrastructure assets that command three to four times the valuation multiples of the integrated telecom operators themselves.

Banking: The banking industry is primed for an upswing in M&A activity. Valuations are dropping in banking, with average price-to-book value decreasing by 35% globally in 2020. Even after gradual consolidation, banking remains a fragmented industry across all key markets, with the top five banks accounting for only 30% of total deposits in the US, 40% in the UK, and 38% in China. Unlike many other industries, regulators are creating conditions and frameworks that favor consolidation. For example, the European Central Bank recently published guidelines for consolidation in the banking sector.

Finally, there is the impact of Covid-19. Despite government interventions, the economic fallout has caused banks that entered the pandemic in a weaker position than their competitors to weaken even further, widening the rift between the less healthy banks and those that have remained relatively robust despite substantial losses and lower capital ratios. The rift will create opportunities for stronger players to acquire and for weaker players with capital ratio gaps to look into their portfolios for potential businesses to divest.

Insurance: Insurers are streamlining their businesses to redefine themselves with a narrower focus and stronger core. Divesting of noncore businesses represented about 70% of insurance deals valued at more than $1 billionover the past five years. Buyers are taking advantage of these divestitures to strengthen their market position and step into near adjacencies. As there is still considerable uncertainty about how emerging capabilities will mature, many established insurers have chosen to access new capabilities with investments and partnerships. While private technology investments by incumbent insurers slowed in 2020 from their recent pace, Bain expects a rebound in 2021 as insurers build for the future. The continued market enthusiasm for insurtechs suggests that there is no shortage of innovative ideas and capabilities that could benefit insurers.

Editor's note: To request an interview, please contact Katie Ware at [email protected] or +1 646 562 8107.