Dealmakers say private equity best placed to flourish in the next 12 months

71 percent of dealmakers agree that private equity (PE) firms are better placed than corporates to take advantage of buying opportunities presented by COVID-19, according to the ninth edition of the European M&A Outlook, published by CMS in association with Mergermarket.

The report offers a comprehensive assessment of dealmaking sentiment in Europe’s M&A market. It reflects the opinions of 330 corporates and PE firms based in Europe, the Americas and APAC about their expectations for the European M&A market in the year ahead.

Horea Popescu, Head of CEE Corporate M&A at CMS and Managing Partner of CMS Romania, said: “The CMS-Mergermarket study is an efficient tool for measuring expectations in the M&A market, and this year’s edition confirms the growing trend in investor confidence regarding existing opportunities in the European M&A market. Despite the restrictions imposed by the COVID-19 pandemic, the flow of M&A transactions was maintained. In the first half of 2021, M&A activity in Central and Eastern Europe increased by more than 50 percent in volume and 54 percent in value compared to the same period last year, a trend that we hope the market will maintain in the next period, given that confidence and investment appetite remain at high levels. In Romania we continue to rely on the sectors that have been growth drivers recently, such as software and IT services, energy (especially energy from renewable sources), the health/pharmaceutical industry and technology.”

Louise Wallace, Head of the CMS Corporate/M&A Group, commented: “PE firms have limited timeframes to deploy capital so are expected to move quickly to get deployment levels back on schedule. Whilst corporates are currently focusing on reopening offices and sites as COVID-19 restrictions ease, we expect greater activity from these strategic buyers as well as from the European and US SPACs keen to deploy capital.”

While financial buyers may be better placed than strategic buyers, more than half of survey respondents expect the overall level of European M&A activity to increase over the next 12 months, with both corporates and PE firms eager to make up for lost time. This stands in stark contrast to last year’s poll, in which 78 percent of interviewees were preparing for a decrease in M&A.

“The COVID-19 vaccine roll-out has been the real game changer, allowing countries to reopen and supporting a revival in economic growth,” said Stefan Brunnschweiler, Co-Head of the CMS Corporate/M&A Group, adding, “While the pandemic is far from over, vaccine programmes have been effective at limiting the impact of the virus, enabling investment and a return to growth.”

Although asset prices have held up through the pandemic and vast government stimulus has kept businesses from insolvency, almost a quarter of respondents (24 percent) see undervalued targets as the most important buy-side driver of M&A activity over the next 12 months. A similar share (22 percent) identifies distressed-driven M&A as the most important catalyst for sell-side activity.

Survey respondents see this as only the beginning, with 72 percent expecting ESG scrutiny to increase during the next three years, and 65 percent predicting that due diligence will focus more on ESG factors over the same period.

Rodica Manea, Corporate Partner at CMS Romania, said: „The pandemic drove rapid change in the business and financial environment, including M&A transactions. Most tools for remote deal-making, such as virtual data rooms and teleconference negotiations, were already in place before the pandemic, but COVID-19 broke through the last of the resistance and necessitated the acceptance of virtual meetings. Progress has been made in legislative changes to facilitate contactless arrangements, including digital filings and use of electronic signatures. Also, the pandemic has highlighted how business profitability is inextricably linked to public health and social and environmental stability, prompting dealmakers to build ESG criteria into their M&A strategies and due diligence.”

Sector-wise, Technology, Media and Telecommunications (TMT) is among the sectors set to continue to dominate dealmaking. “In H2 2021, we expect TMT M&A to maintain the strong pace observed during the first six months of the year,” explained Ignacio Zarzalejos, Partner at CMS Spain. “Dealmaking in the space will continue to rise, and TMT will stand out as one of the main sectors for M&A.”