The year ahead: 2021

After a year of upheaval and uncertainty triggered by the COVID-19 pandemic, 2021 should be a year of resurgence in global M&A as dealmakers adapt to new considerations for the negotiation and implementation of transactions.

As the world economy emerges from the effects of COVID-19, M&A deal volume and value should remain strong, even in the face of more stringent regulatory processes and reviews. Technology and life sciences M&A are likely to continue as leading sectors for transactions, while in parallel consumer M&A may see a rebound, as businesses work to reshape in response to a world that requires more ability to engage remotely. Foreign direct investment reviews, including FDI regimes expected to roll out in the UK and Continental Europe, will likely become more imposing across a number of key jurisdictions, following the lead of the expanded reach of CFIUS within the United States.

Across sectors and geographies, transactions will be negotiated with heightened consideration of vulnerabilities for unforeseen events. In particular, special focus will be applied to the strength, security, and resiliency of supply chains as major economies pursue strategies to reduce their dependency on assets and resources produced or delivered from afar.

With the inauguration of Joe Biden as the president of the world’s largest economy as well as new Democratic majorities in Congress, shifting U.S. government policies will inevitably impact M&A. The Biden Administration is expected to have an active agenda in the areas of regulatory enforcement for antitrust, environmental, and tax matters. In addition, there will be a marked difference in the foreign policy arena for the United States through more predictable and normalized engagement, coupled with decreased politicization, which together should create a more stable environment for the proliferation of cross-border M&A.

 

"Following a year of economic and social turmoil, transactional activity should proliferate during 2021, as international relations benefit from the stabilizing impact of new leadership within the United States and the world emerges from the grip of the pandemic."

William J. Curtin, lll
Hogan Lovells Global Head of M&A

Ongoing impact of COVID-19

 

The M&A recovery that began in the second half of 2020 is poised to continue during 2021 as public confidence grows as a result of enhanced testing, improved treatments, and widespread vaccination. Companies that conserved cash and securities are well positioned to deploy their resources. Unique opportunities likely will emerge as distressed companies become acquisition targets, while competition will be high for certain types of assets, such as technology and digital.

Even as public confidence grows, fundamental elements of dealmaking, such as provisions relating to deal certainty and efforts to agree upon valuation, may prove challenging to the extent COVID-19 variants emerge. Negotiations relating to how parties define “Material Adverse Change,” and other M&A deal terms, such as covenants to operate the target business in the ordinary course, representations and warranties around pandemic-related matters, and the outside date after which each party has the right to exit the transaction without liability, will continue to receive increased attention.

Deal processes are likely to remain significantly “virtual” in 2021, with in-person roadshows, meetings, negotiations, and site visits largely replaced by the technology-driven, remote equivalents established in 2020.

Supply chain resilience

 

Following widespread resource disruptions caused by the COVID-19 pandemic and short-term measures implemented in response, we expect that companies will apply increased focus on their supply chains during 2021. This increased focus is anticipated to create opportunities for M&A as companies seek to shore up sourcing arrangements, re-position global and regional supply chains, and, in some cases, offshore certain key centers.

Early this year, President Biden issued an Executive Order that aims to insulate United States supply chains from future disruption, while boosting manufacturing and research in the U.S., which should present further M&A opportunities. Companies also are likely to consider new technology opportunities – through acquisition or strategic partnerships – to enhance their ability to monitor and control supply chains and to optimize supply chain resiliency.

In supply chain negotiations, contracting parties will look for ways to mitigate risk, including by focusing on terms such as force majeure and frustration, exclusivity and alternative supply rights, and termination and suspension rights.

Tech M&A outlook

 

As the strongest performing sector for M&A in 2020, by deal value and volume, the technology sector is expected to experience a continuing surge in deal activity throughout 2021.

The COVID-19 pandemic accelerated the necessity for technology transformation. In 2021, companies will pursue, through acquisitions and strategic collaborations, assets that facilitate distance working and remote consumption as well as opportunities in areas such as internet of things, artificial intelligence, and cloud computing. Digital health and fintech also are likely to see significant M&A activity as health providers and financial institutions seek further opportunities to remain connected to their customer bases.

Heightened government intervention and increased regulation of foreign direct investment in sensitive technologies may create headwinds in the sector in 2021. These headwinds will need to be considered as companies assess the potential for extended closing timelines and reduced certainty of their transactions.

Rise of FDI Regimes

 

We expect governments to continue the trend of focusing on national security reviews related to the flow of foreign direct investment (FDI) into their jurisdictions.

During 2021, the UK is anticipated to implement its first stand-alone FDI regime which will introduce mandatory clearance requirements for a number of sensitive sectors including critical infrastructure, advanced technologies, military or dual-use technologies, and satellite and space technologies.

By the end of 2021, more than 20 jurisdictions across Continental Europe will screen FDI, an increase of 40% against last year. In addition to these national filings, a new EU cooperation mechanism applies. Agencies will share information about sensitive transactions across the EU, adding complexity and time to the review process.

In the United States, we have just passed the one-year anniversary of the implementation of final regulations implementing the Foreign Investment Risk Review Modernization Act of 2018, which broadened the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) and introduced mandatory filings for certain foreign investments. The Biden Administration is not expected to usher in dramatic changes to the CFIUS regime, but CFIUS is likely to continue its recent practice of more fervently assessing cross-border  transactions for which the parties opt not to file with CFIUS.

The rise of FDI regimes will require careful navigation when structuring and executing global M&A transactions, as governments often have greater discretion to intervene in transactions on the basis of FDI regulations compared with other regulatory processes and there is less certainty as to the outcome.

Impact of the Biden Administration

 

With Democrats now controlling the White House and both Houses of Congress, President Joe Biden will work to implement campaign promises pledging increased regulation and enforcement in antitrust, environmental, tax and other areas. The effect of such regulation and enforcement on M&A activity may be limited, however, as narrow Democratic congressional majorities are more likely to encourage moderate rather than extreme changes. Reviving economic growth remains a U.S. domestic policy focus, led by a nearly US$1.9 trillion stimulus package that included approximately US$90 billion allocated to transportation and infrastructure causes to revive and encourage commerce.

U.S. foreign policy, which is expected to be more predictable and less politicized under a Biden Administration, will continue to influence cross-border deal making in 2021. Some Chinese companies are already seeking to revive U.S. deals that were put on hold during the Trump Administration. Early steps of the Biden Administration, such as re-joining the Paris Agreement under the United Nations Framework Convention on Climate Change, as well as normalizing engagement with traditional U.S. trading partners, signal a renewed openness to international dialogue and policymaking that is expected to promote additional cross-border M&A.

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M&A Year in Review | 2020

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