Our Analysts' Insights

2020 started out with great financial momentum. The MSCI All Country World Index of large-, mid-, and small-cap stocks across 23 developed and 26 developing markets had risen almost 24% over 2018, an ounce of gold was worth 18% more than 12 months prior, and private equity groups had accumulated US$1.5 trillion in funds to invest. Businesses were primed for a stellar 2020, but by March, COVID-19 pushed most of the world to shelter in place. Companies shut down, employees were furloughed, and life and economies around the planet slowed.

Fast-forward seven months and we see the reboot of traditional economic activity – mergers and acquisitions among them. For example, the language sector in the last two months witnessed noteworthy M&A transactions by RWS and Acolad, as well as smaller acquisitions by Apostroph Group and BIG Language Solutions. And with the RWS purchase of SDL, we expect to see more M&A and organic business activity by TransPerfect and Lionbridge aiming for a billion dollars in turnover. These language sector deals mirror a trend across many industries:

• Worldwide M&A activity is rising but still behind 2019. Transactions shot up in the third quarter after a fallow first half. For September 2020 Reuters reported more than US$1 trillion in deals: $414 billion in the U.S., $231 billion in Europe, and $274 billion in Asia-Pacific. However, the year-to-date total for M&A was US$2.2 trillion through September, down 21% versus 2019. 
   
• Buyers are targeting COVID-resilient companies. Third-quarter M&A focused on sectors such as life sciences and technology that performed well despite the coronavirus – for example, Siemens Healthineers bought Varian Medical Systems and NVIDIA acquired Arm Holdings. Why these industries? Our multiple surveys of LSPs in 2020 on the demand for language services during the pandemic highlighted those two verticals plus broadcasting, entertainment, gaming, financial services, and several others that sell goods and services that people need and use during health crises – as well as others that, to paraphrase Harvard economist Raj Chetty, sell things that can be purchased in “places where people can safely spend their money” – that is, online and remotely. 

Why Is There a Resurgence in M&A Activity Now?

Why are these deals happening now? Mergers and acquisitions are an essential component of corporate strategy, so it was only a matter of time that M&A business as usual would resume for companies – as part of their growth strategy and this year for some to emerge stronger from the pandemic: 

• Why do companies buy others? M&A is a crucial component of their corporate strategy. They plan to: 1) grow their business or market share in existing sectors by merging with or acquiring a competitor or a firm with complementary business; 2) buy companies with products, services, distribution channels, brand equity, or other assets they could use for growth instead of creating them in-house; or sometimes to 3) restructure equity and debt by bringing in new investors or shareholders operations. In the language sector, LSPs have long used M&A as a way to achieve business growth – the biggest companies got to be as big as they are through multiple acquisitions (“The Fastest-Growing LSPs: 2019”). Remember the Big 8 accounting firms that became the Big 4? Growth by acquisition and industry roll-ups are familiar tactics in many industries, especially when there is a long tail of market share as in the language sector. 
   
• Why do companies sell? They want to be acquired or merge for a few basic reasons: 1) the principals want to retire; 2) they think it’s time to move on and believe that an acquirer can grow the business better than they can; or in the worst case, 3) they want to get out of a loss-making or declining business – or they fear such an outcome. In some cases, the owners stick around for some defined period or become essential contributors to the merged entity. For whatever reason they sell, it must be their strategic decision to do so – not because some M&A headhunter promises a good price for the business. 
   
• Why now? Some of that trillion-dollar set of deals is certainly due to the revival of negotiations that were delayed by the pandemic when nobody knew what was happening or when it would end. Now CEOs realize they cannot stand still. They have some faith in a recovering economy and believe that this is the time to get on with business, build or improve their platform, and emerge stronger. In other words, the same strategic reasons that drove them before the pandemic drive them today. Coming out of the financial disruption of 2008, aggressive companies focused on growth took disproportionate share and returns versus more conservative firms. 
   
• Who’s buying? All the capital available on December 31st didn’t disappear. Some sat in accounts earning low interest or was invested in a still strong stock market. Money for M&A comes from: 1) public companies using their share value to buy others, as RWS did with SDL; 2) firms with strong free cash flow to invest; 3) companies with good credit ratings using debt financing; 4) private equity groups buying stakes in or whole companies à la H.I.G. (Lionbridge) or Carlyle Group (Memsource); and 5) even private wealth, as in the du Fraysseix family participation in Acolad’s acquisition of Amplexor. Companies in adjacent sectors bought into the sector – AMN Healthcare Services (Stratus Video), Teleperformance (LanguageLine Solutions), and Amazon (NLP companies). 

Want to Buy, Sell, or Merge?

Respondents to CSA Research’s annual Global Market Study have shown consistent interest over the years in buying, selling, or merging. We asked, “How important will the following actions related to merger and acquisitions be in 2020?” In next week’s blog, we’ll provide some data about M&A intentions among respondents to our 2020 survey and recommendations for best practices.