M&A in the Nordics: Breaking Deal Records
As we look back across 2021 at M&A in the EMEA region, we can’t help but feel buoyed. Despite the pandemic, the market reached a record peak with a total value of €1.37tn across the year. And in the Nordics, M&A dealmaking outpaced the rest of Europe. In fact, the region broke its own records with a huge 44.7% year-on-year increase and a staggering $141bn in transactions.
However, the world has significantly changed since then with the Russian invasion of Ukraine, rising inflation rates, supply chain issues, labor shortages, an increase in public scrutiny around companies, and a focus on the climate emergency. It was perhaps to no real surprise that the vast majority of the audience at the event believed that the war in Ukraine would have an impact on dealmaking going forward.
However, as Lars Martin Sveen, partner at Thommessen pointed out, the M&A deals pipeline coming out of Q1 of 2022 is still significant and remains around the same levels as last year. However, he also noted that the boom in capital markets activity, which also saw record levels in both 2020 and the start of 2021, fell in the second half of last year. So, it will be interesting to see whether the slower momentum here will affect M&A activity negatively, or whether these funds will move into the M&A space and thereby create even larger volumes rather than sit for a while in light of the geopolitical uncertainties.
Asked what drove this capital markets boom followed by the drastic fall in Norway, Sveen pointed to the fact that investors in private placements were now looking at the junior market as a way of achieving increased liquidity from an early stage, and the increased ESG focus which appears to be driving “Covid resilient” businesses. He further explained that the downturn came when the junior market didn’t provide the liquidity that was expected, and the pricing was unable to be upheld. These funds have now been left to find other targets, unless the investors take the decision to sit still. If they do the latter, it was agreed that this would probably only be for a short while, as was shown by the (minor) impact of Covid on the market.
Kristen Vegge, head of M&A for Nordics, at RiskPoint, echoed Sveen’s sentiments and pointed to the fact that the junior capital markets and the general M&A market are somewhat linked by pricing spill-over effects but that they are not closely coupled in reality. As an example, Vegge pointed to Europe, which saw only a slight reduction in pricing of previously very aggressively priced IT and tech assets which had been most probably driven by the general markets and the US. It was therefore to no huge surprise that our next polling question saw the audience indicate that they believed that PE and VC deals would dominate over the next 12 months.
ESG in Due Diligence: Buzzword or the Real Deal?
The discussion then moved on to the importance of ESG in the due diligence process – is it more important today or just a buzzword?
Rosie Corcoran, VP of sales for the Nordics and UK at Datasite, shared her insights on both the investor side and the seller side and how technology is assisting them both. While investors are focussing on sustainable projects as part of their due diligence analysis, sellers are creating new workstreams with increased data to highlight ESG compatibility. The benefits that technology can bring to both of these are immense.
Sveen pointed to the fact that when it comes to businesses within the ESG space, the taxonomy is an obvious driver for pushing capital towards these types of businesses. As lawyers, he and his colleagues are seeing ncreased deal flow in this area, though he admits that the definition of ESG is not always clear. He also noted the ESG due diligence is mostly covered by the investors or by other third-party specialized firms.
Interestingly, with his insurance hat on Vegge added that ESG is increasingly important in terms of warranties. He explained that at RiskPoint they are definitely seeing a heightened focus on ESG within the due diligence process. He also suggested that specialized ESG due diligence workstreams are becoming increasingly commonplace. However, warranties are often broad and soft and also refer to topics like child labor where you have outsourced production in exposed industries like clothing where international standards are to be complied with. He pointed out that, in reality, these are difficult areas to diligence and often rely on the relevant target company to be certified in certain bureaus which may cause concern. Luckily at RiskPoint, they have not seen any claims across Europe in these areas. Though in terms of taxonomy, he explained that he has not yet seen a lot of focus on compliance rules, though he does expect these to come soon enough.
Insuring the M&A Deal
Moving on from ESG and warranties, Vegge nodded to the steady increase of deals being insured over the past few years. He stated that this clearly showed a more aligned market whereby the market players (lawyers) understood which warranties to expect to have insured, leading to some of the more technical points being generally agreed upon and in turn making the entire insurance process much more streamlined and efficient.
He also pointed to the fact that there had been some very severe M&A insurance claims in the Nordic region recently, including in Norway which he and the rest of the panel believe had driven additional interest for insurance products when dealmaking.
Value in M&A Technology
Wrapping things up, the audience was polled again and, to limited surprise, speed and efficiency came up top when asked what the most important aspect of technology was for getting deals done.
In fact, technologies like Datasite provides can result in 40% effort and time savings during the M&A process when performing tasks using its applications. And when time is money, tools that speed up the M&A process are critical.