Survey: Record-breaking M&A surge will continue as dealmakers prioritize ESG

In a survey of more than 150 M&A professionals, 97% say ESG reporting matters when considering a deal

A new Grant Thornton LLP survey of merger and acquisition (M&A) professionals finds that dealmakers are optimistic the rise of M&A deals will continue despite challenges posed by regulation and the ongoing pandemic. Most notably, 68% say they expect deal volume to continue to rise over the next six months, furthering the record-breaking year for M&A activity.

The survey, which polled 156 dealmakers from companies with revenues from $250 million to more than $5 billion, also found that M&A professionals are looking beyond borders: Almost two-thirds (65%) of respondents expect an uptick in cross-border deal activity.

When asked in which industries they expect the most deal activity, respondents most frequently pointed to technology (53%), healthcare and life sciences (43%) and services (33%). Elliot Findlay, Grant Thornton’s national managing principal of Mergers and Acquisitions, says he is seeing a lot of companies outside the technology industry acquiring technology companies.

“The pandemic accelerated the transition from brick and mortar to digital for a wide range of businesses, so many companies are trying to catch up on digital transformation,” says Findlay. “Plus, with interest rates still low, buyers are more willing to pay for strong assets. We’ll just have to see where the ceiling for dealmaking is, but the height of that ceiling may depend on whether valuations continue to rise.”

According to the survey, just over half of dealmakers polled (53%) believe valuations will increase. Still, Eric Burgess, a partner in Grant Thornton’s Strategy and Transactions practice, notes that valuations are already at unprecedented levels.

“Companies are more eager to diversify their revenue streams than perhaps ever before,” Burgess says, “but it remains to be seen if valuations can get much higher. We’ve already reached a record level of dealmaking, and an increase in valuations will put us even deeper into brand new territory.”

ESG is top-of-mind

The Grant Thornton M&A survey also found that environmental, social and governance (ESG) metrics are top-of-mind for dealmakers.

Ninety-seven percent of the dealmakers surveyed say a target’s ESG program and reporting capabilities are important considerations in any deal. These findings are consistent with Grant Thornton’s 2021 Q3 CFO Survey, in which 87% of respondents said ESG is a significant consideration when it comes to corporate decision-making.

Grant Thornton leaders say this amplified attention toward ESG reflects both the war for talent and shifting corporate priorities.

“Given the workforce issues confronting a lot of employers right now, how well a company treats its people can make a critical difference for a buyer,” says Findlay. “Most buyers don’t have a formal ESG due diligence process in place, but companies are moving in that direction.”

Carlos Ferreira, Grant Thornton’s national managing partner of Private Equity, says that private equity firms have a major role to play when it comes to ESG.

“Large private equity firms know their targets won’t have very mature ESG programs compared to larger organizations,” says Ferreira. “But those firms can help their targets create effective ESG programs in a way that private companies cannot.”

Meanwhile, Grant Thornton leaders say the focus on ESG makes it more critical than ever to demystify what can be a complex space.

“Companies are getting feedback from a lot of constituencies — their employees, customers, investors, even the public,” notes Jim Burton, a partner and leader of Grant Thornton’s ESG and Sustainability services. “It’s important to remember you don’t have to address everything at once. Rather, an incremental approach to ESG will better position your organization for the long run. Do an assessment, find out what matters most to your key constituencies, and make sure you have the information and tools in place to set goals and measure against those metrics.”

The Biden administration’s impact on deals

The M&A survey also found that 53% of M&A professionals think financial regulations implemented by the Biden administration may have a negative impact on M&A activity, while 50% think taxes will have a negative impact. Another 45% believe labor regulations will impact their plans negatively.

When asked about specific tax proposals, the 15% minimum tax rate and a possible increase in corporate taxes drew the most concern. On the other hand, the administration’s infrastructure plan drew a more favorable reaction, with 57% of those surveyed saying the plan will have a positive impact on deal activity.

Dealmaking and the war for talent

Amidst a continuing surge in M&A, roughly 50% of survey respondents say they expect to either “increase” or “significantly increase” the size of their teams.

However, given the ongoing war for talent and labor shortage challenges highlighted in Grant Thornton’s State of Work in America survey, which polled more than 1,500 full-time employees of U.S. companies, Grant Thornton leaders believe this 50% figure will increase in the months ahead.

“I don’t know a private equity firm or corporate buyer that isn’t looking to add people,” says Burgess. “Many private equity firms are trying to add an M&A team to each portfolio company, which the industry didn’t see a few years ago.”

According to Pitchbook data published in October, private equity dealmaking in 2021 has amassed a record value of $787 billion — surpassing the record for annual value established in 2019. To maintain that high level of volume and value, Burgess says many private equity firms are enmeshed in a competition for top talent.

“While a lot of very qualified candidates want to join private equity firms, demand is starting to outpace supply,” he says. “Corporations and private equity portfolio companies know they need premier talent to sustain this incredible momentum in the new year, so they have officially joined the ‘war for talent.’”

Resiliency amidst supply chain challenges

M&A professionals and Grant Thornton leaders both believe the effects of the ongoing pandemic will continue to impact dealmaking. Specifically, supply chain shortages created by COVID-19 remain a major concern.

“Sellers want to forecast what their results will be when they get their supply chains sorted out, but buyers aren’t taking that on faith,” says Burgess. “As a result, supply chain shortages are a major driver for earnouts right now.”

Yet concerns about the virus itself appear to be subsiding — at least for some dealmakers. Seventy-three percent of the private equity investors surveyed say they expect little to no disruption on dealmaking due to coronavirus cases in the U.S.

Ultimately, the Grant Thornton M&A survey highlights the challenges dealmakers are anticipating as they emerge from a record-breaking year.

“M&A professionals have been adept at navigating everything COVID has thrown at them thus far,” concludes Findlay. “As businesses contend with a new COVID variant plus labor and supply chain shortages, it will be interesting to see how long the current dealmaking surge will last. On the other hand, we could see even more records being broken.”

To see additional findings from Grant Thornton’s recent M&A survey, visit www.grantthornton.com/library/articles/advisory/2021/for-m-and-a-how-high-is-up.

About Grant Thornton LLP

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