Abundance and its precautions, by Javier Perez-Vargil

When the impact of the coronavirus in the spring of 2020 brought activity to a halt, many of us thought this would have a strong impact on mergers and acquisitions. Indeed, for several months, ongoing transactions were either delayed or immediately canceled. However, starting in the summer, they are back in force, at the same time as the activity. To be sure, the reactivation has been uneven. By region, growth started first in China and the United States, while it took longer in Europe. Sectors related to technology or new ways of working have grown intensively, while the tourism and entertainment sectors have not yet recovered their pulse.

Corporate operations have developed in parallel and have reached very large volumes in recent quarters. We are witnessing a cycle of very intense activity, which may be surprising given the perception that we have, in fact, not recovered from the crisis. To explain this abundance, it is necessary to distinguish structural and other situational factors. Let’s start with the first. The confinement allowed—and may have required—a reversal of many entrepreneurs in relation to their businesses. For example, it has always been diagnosed that the average size of a Spanish company is insufficient, and that in relatively mature sectors the only way to gain efficiency is to increase size through acquisitions.

Sectors related to technology or new ways of working have grown intensively

The Covid virus has forced us to look at the forest, not just the trees, and understand that internationalization, innovation, and improved productivity require scale. For this reason, we see mergers in mid-sized companies daily, with generally positive results. Besides the above, the development of financial markets plays a very important role. The practicability of negative interest rates and prolonged liquidity injections by central banks has greatly led to the development of private equity funds as an attractive investment alternative; Hence more transactions and increasingly higher prices.

The concern is whether we will continue like this. The structural elements are here to stay, and on this aspect, the activity will not stop. Even more mysterious is the point of view regarding interest rates, as there are opinions for all tastes. Now, when the inflation rate in November in the US reached 6.8%, it seems difficult to say that it is a temporary phenomenon. There is inflation when it comes to inflation. A rate hike could have a strong impact, perhaps not on volume but on trading prices. It must be taken into account, then, in the world of mergers and acquisitions, when they are as important as they are.