By Nick Cheek, Global Managing Editor, Mergermarket
In March, Datasite invited four eminent M&A experts from a variety of backgrounds to a roundtable to discuss dealmaking in Benelux. The group focused on three key topics: trends, sectors, and operational changes. Below is a snapshot of some of the key findings from that discussion.
In the US, 2020 was clearly the year of the SPAC (Special Purpose Acquisition Company). And that trend has continued into 2021. In the first two months of this year, there have already been 190 of these special vehicles.
Towards the end of last year, the SPAC phenomenon crossed the Atlantic and we saw a sudden increase in transactions in Europe. The real advantage of a SPAC is that it is a controlled IPO, with the deal terms confidentiality negotiated with sophisticated investors and with a certain amount of protection for the sponsors, who can retain up to 20% of the equity. The SPAC revolution is very likely to continue in Benelux and all across the continent.
Another stateside trend that has crossed the ocean is the growing use of M&A insurance. Recent Datasite research has shown that, in the last year, there has been a 35% increase in the number of those taking M&A cover on Benelux deals. Given the ongoing pandemic, this trend should grow in the next 12 months.
Bank debt is still abundant and cheap and will continue to drive significant M&A and higher multiples for some time. However, there is a market trend on the horizon – rising inflation. Dealmakers are unaccustomed to such a scenario. It will be interesting to see how parties in the Benelux region deal with it.
The flight to quality
There has been and will continue to be a clear shift towards quality in the market. Dealmakers are looking for high-growth, stable companies with recurring income. This will also drive valuations upwards, both on the equity and debt side.
During the pandemic, sectors such as food, financial services, transport, real estate, and logistics have shown genuine resilience and should all continue to see high demand for M&A. However, none of these will topple technology, media, and telecommunications (TMT) from its top spot as the sector of choice.
TMT rules the waves
The digitalization trend, which was already barreling along pre-pandemic, has only gained momentum in the past year.
Companies across all sectors have technology or digitalization as their highest priority. For example, consumer organizations are seeking to improve their e-commerce solutions while logistics firms are looking for software solutions to optimize route planning. There is also a great deal going in the healthcare system, and in consumer and food safety compliance and certification, which is being driven or supported by technology.
In addition, as part of the digitalization piece, there is a huge focus on subscription as a business model, which provides long-term revenue recognition.
Preparation and process
Since the pandemic took hold, preparation has become even more important and the process has started earlier, for buyers and sellers. Both sides of the deal table have had to adapt to fully digitalized processes – such as drones inspecting sites - and finalizing transactions in a completely virtual world. This has meant truncated timelines and new ways of working and it is a trend that will continue even when COVID subsides – in Benelux and beyond.
Due diligence speeds up
The acceleration of the deal process is seen in these startling findings from a recent Datasite survey. In the Benelux region, 90% of practitioners think that, within the next five years, due diligence will last less than three months. And, of those, 65% believe it could be shortened to a little as one month.
This is going to be challenging for dealmakers, especially in the current conditions, where there needs to be a lot more due diligence on all pandemic-related subjects, such as health and safety, criteria on top clients, and IT around business continuity.