Disruptive Change in many Industries Increases the Number of Scope Deals

The Corona pandemic is accelerating digital development in many industries. While M volumes declined significantly during previous crises (including the dot-com bubble and the global financial crisis), we are seeing a milder development in the current Corona crisis. Although the deal volume in the EMEA region fell by six percent in 2020, this decline is not comparable to the other crises. The people involved quickly realized that the general conditions had changed significantly due to temporary lockdowns. The strategic tool of M was now used to drive acquisitions forward digitally as quickly as possible in order to acquire new (digital) skills inorganically. Furthermore, the number of regional deals increased again. The development in China in particular is striking, as the share of domestic transactions there rose to 95% compared to 75% five years ago.

In addition, the importance of so-called scope deals has increased significantly from a global perspective. These transactions enable companies to repair gaps in their core business and expand into new business segments. The core business of the respective company can then generate growth through cross-selling potential. The share of scope deals globally in 2015 was 41% (of M deals with deal volumes > USD 1 billion), but by 2021 it was already a remarkable 56%.

In comparison, scale deals are of course still in demand in order to further expand or consolidate the economies of scale. However, the strategically sensible targets are limited and these deals are increasingly being restricted by regulatory authorities worldwide.

Which industries stand out in scope deals?

The technology industry is playing a pioneering role in these transactions. Established market participants are using the opportunity to address rapidly growing business segments or build up specialist expertise that is not yet available. In this environment, over 90% of deals are growth-driven. Not only are strategic market participants looking for strategic targets, but some investment companies have specialized entirely in these growth segments. However, the automotive industry is catching up. The associated disruptive change requires such inorganic growth steps. Anyone who doesn’t keep up will lose technological ground in the long term. Competition for such attractive companies to expand their own expertise will increase significantly.

There are various ways to mitigate the associated risks in an M transaction.

• Forward-looking planning and implementation of technology transfer
• Use of earn-out components
• Minority stake to reduce capital investment
• Co-investments with investment companies

The current Corona period is also changing the M dealmaking process, which has now been digitized much faster (including contract negotiations via video conferencing systems or virtual due diligence). To ensure that companies don’t fall behind, it is advisable to make appropriate adjustments here too.

• Expansion of the M team (proven industry know-how must be available)
• Professional structuring of the M process (acceleration of the decision-making process and regular reporting)
• Use of digital M tools (increase deal flow through virtual M channels and better risk assessment of potential targets)

The M framework conditions have changed massively and require an adapted strategy from all market participants. M will therefore play an even more important role in companies in the future.

Get the right M advisor on your side. We have almost completely digitized our M process and are therefore one of the most innovative corporate finance boutiques in the German-speaking area.

The starkpartners team is happy to be available for a confidential exchange.

https://starkpartners.de/contact/