The next drivers of strategic M&A

• Global

• Corporate
• ESG
• Mergers and acquisitions

26-07-2022

It felt extraordinary to host an event which saw over 150 attendees join the firm in London for its conference on the next drivers of strategic M&A. Not so much the fact that the room was shared by so many people with a passion for M&A, but the fact that we were sharing a room at all following several years of pandemic disruption.

Keri Rees, Co-Head of Global Corporate and Commercial Practice at Eversheds Sutherland , kicked off proceedings by asking the room’s participants to simply turn to their left or their right, and shake hands with their nearest neighbour. “How weird does that feel?” he said.

Perhaps, momentarily, it did feel remarkable. The disruption from the pandemic has significantly altered what we have traditionally seen to be normal. And it is this period of disruption that very much set the tone for Wednesday 15 ^th June’s conference launching Eversheds Sutherlands’ latest report – Putting the pieces into place: The next drivers of strategic M&A .

How is the war in Ukraine affecting M&A?

If anyone involved in M&A were to forecast the activity of the last few years, from a once-in-a-lifetime pandemic to the Russian invasion of Ukraine and geopolitical events that ensued, they likely would have expected deal activity to grind to a halt. But despite a small blip in early 2020, M&A came through strongly having shown enormous resilience.

“While M&A deals might be different when compared to a few years ago, activity will continue” – Keri Rees.

This resilience is why optimism can still be felt in the midst of a gloomy economic outlook. Against a backdrop of rising inflation, the European Central Bank called an emergency meeting on 15 ^th June, creating a tense moment for financial markets. This year’s Davos was hardly full of optimism, as experts discussed whether current economic scenarios were likely to cause a decline in M&A markets following a record year for deals in 2021. But even then, the boom of 2021 was largely fuelled by debt and fiscal stimulus.

Nevertheless M&A continues, albeit slightly battered and bruised, and positivity filled the home of the Royal College of Pathologists, where our conference was held.

Mark Sorrell, Co-Head of Global Mergers & Acquisitions at Goldman Sachs, provided the keynote on the current landscape of the global M&A market, including discussion around slowing economic growth, public market valuations at multi-year lows, increasing volatility, and inflation.

“We’re in a period of much lower growth, and base expectations are two years of very high inflation, followed by moderation. UK and Europe markets are being hit hardest, and the gap between the US and Europe has widened significantly. But when you cut through it all, M&A activity has been remarkably resilient.” – Mark Sorrel, Co-Head of Global M&A at Goldman Sachs

What’s driving M&A in 2022?

Mark went on to discuss the results of a Goldman Sachs’ survey of Heads of M&A and deal partners which identified what was driving M&A activity at the start of 2022. The findings revealed that scale and growth, relative competitive positioning via technology innovation, synergies, and ESG priorities were all drivers for M&A activity at the beginning of the year.

Mark also spoke about the current focus on capital allocation - how the focus on public and private deployment has never been greater - and diversification, more nuanced as activist investors continue to keep companies on their toes. Public market valuations are at a conservative economic scenario level, and cross-border M&A continues to be a declining proportion of M&A activity.

Concluding, Mark said, “there are a lot of threats around and we are seeing portfolios being churned with greater volatility, but we’ve been here before. And when uncertainty reduces, activity increases very quickly.”

The drivers of M&A and value

Mark was followed by the first of two panels: Tech, Talent, Trade: The Drivers of M&A and Value . Moderated by Eric Knai, Partner and Head of M&A International at Eversheds Sutherland, he was joined by a highly expert panel:

• William Rucker, Chairman at Lazard UK
• Rosie Bichard, an Investor and Board Member
• Mark Gregory, General Counsel at Rolls-Royce
• Jubilee Easo, a Partner in the Eversheds Sutherland Infrastructure Group

Eric started by addressing the key finding from the report, that M&A is increasingly being driven by the need to increase business resilience via satisfying strategic demand for tech, talent, and trade capabilities, forming a new M&A triarchy . In fact, more than 70% of business leaders viewed these three capabilities as the key levers of growth ; something that all the panel agreed on. William Rucker, in particular, made the intrinsic link between sustainability, tech and strategy: “Our sustainability strategy is our tech strategy and our tech strategy is our business strategy – these are all interlinked to ensure a robust business that can navigate the new economy.”

Alongside talks of ESG demands scaling board agendas, the panel spoke to the finding that 77% of business leaders see “brand and reputation” as an attribute they value in an acquisition target, making it the number one driver of value.

The role of brand and reputation in M&A

Although opinion was somewhat divided, the experts agreed that brand and reputation has never been this important in preparing and protecting your organisation, especially through an ESG compliant lens. “This is felt most acutely in the energy sector,” commented Jubilee Easo, “as the focus to achieve net-zero drives more and more business decisions.”

Rosie Bichard agreed: “We are mainly seeing this as business leaders look to divest away from ‘toxic’ assets, such as coal mines.”

Mark Gregory, General Counsel at Rolls-Royce said that

“Brand and reputation is an important factor that is going to increase what people would pay, whether up front or in respect of security for execution risk. But it’s a little bit more nuanced in the thinking, rather than brand and reputation being the sole reason for an acquisition," a sentiment Eversheds Sutherland agreed with.

Challenges for M&A – can anything hold M&A back?

The second and final panel of the day: Challenges for M&A - Can anything hold M&A back? was hosted by Charles Butcher, Head of International M&A in Asia at Eversheds Sutherland. He was joined by a distinguished panel to discuss the current headwinds to M&A activity:

• Kay Nichols – Board Member, Board Advisor, Fortune 500 Division Head
• Elizabeth Coleman – Partner in the Competition, EU and Trade Group at Eversheds Sutherland
• Dr Andrew Sentance CBE
• Bob Copps, Partner at Eversheds Sutherland

While GDP has largely recovered across the globe following the pandemic, not everything is behind us. The world’s largest economies face slow growth, with significant constraints on supply chains still being felt. The battle for talent continues across the majority of sectors and markets, while businesses struggle to adapt to a systemic structural change in the way we work.

“Normally, when we come out of a recession, there’s a good supply of labour – not this time around” - Andrew Sentance, CBE.

Of course, the war in Ukraine presents the most recent geopolitical shock. Charles drew upon the report’s finding that 67% of business leaders believed the Ukraine conflict has reduced their investment in M&A activity , and the consensus from the panel was that the war has brought into focus a lot of challenges that have long existed in M&A: supply chains, inflation, energy shocks, and geopolitical issues.

The next big headwind for M&A

This led the discussion onto the next big headwind: Protectionism. “Foreign direct investment regimes have proliferated over the past several years, spurred by concerns for national security, critical technologies, infrastructure, data privacy and other issues.  The Ukraine war seems to have focused attention even more on the different tools governments may use to address geopolitical issues, including sanctions and export controls.  All of these need to be considered in analyzing and executing M&A deals,” said our partner, Bob Copps.

In agreement, Kay Nichols commented “FDI expertise and insight is now needed in the early stages of structuring a deal. It no longer can be dealt with purely as part of the exit checklist – the risk is too high.”

Clearly, inflation poses a real challenge for the long-term. But we cannot ignore the opinions of the 1,200 participants who contributed to the findings presented in our report Putting the pieces into place: The next drivers of strategic M&A report: Tech, talent, and trade are the next key drivers of M&A , and the comments from market leaders and commentators that endorse these findings.

Parting note from Keri Rees:

“While I am no doubt in agreement that fragilities have been exposed in the global framework over the last couple of years, I do think that we do our best work together.

“We are a community, and we can help each other through this and come out the other side more resilient than ever. We should be driven by creating value and working to find solutions to make M&A happen. It will be increasingly complex with the issues we face today, but regardless of whether you’re on the buy side, the sell side, or acting for the funder, we should all be pulling together to get the deal done and create value.”