COVID-19 had a drastic impact on dealmaking in 2020. We predicted that access to emerging sources of capital, investment in innovation and the need to right-size operations and supply chains to meet post-pandemic market demands would lead to a bounce back in manufacturing deal activity. We were not wrong. Global mergers and acquisitions (M&A) surged in the first half of 2021 driven by historic M&A activity in the first quarter.
Buyers went big and mega deals emerged. Manufacturing deal value increased by 91% in the first half of 2021 compared to the prior year (even as deal volume decreased by 18%). As anticipated, efforts to meet changing market demand are key for M&A activity. The need to access capital to drive scale, product-portfolio expansion and grow early-stage technology-driven ventures impacted deal activity in the first quarter of the year.
Manufacturing secured $36 billion in total deal value in Q1 of 2021, compared to $17 billion in Q1 of 2020. The COVID-19 vaccine supply and distribution fueled optimism and pushed the US economy to recover faster than others. US deal activity boosted global M&A. As other countries build their vaccine supply, increase distribution rates, and begin recovering socially and economically, global deal activity is expected to continue its surge through the end of the year.
The uptick in M&A activity in the first half of 2021 also signals that companies are ready to invest inorganically in their business or divest non-core assets—or both. While the first quarter of 2021 experienced historic deal value, the second quarter only delivered $10 billion in deal value (compared to $7 billion in the second quarter of 2020). Despite the decline, strong deal activity is expected to continue through the second half of 2021, driven in part by cross-border transactions pushing dealmaking to higher levels as other global economies continue the path to recovery.
After a tumultuous year, a new normal is beginning to emerge.
The following drivers will continue to support the strong manufacturing M&A activity in 2021:
SPACs provide another source of capital and have a timeline: The rise of the special purpose acquisition company (SPAC) continues to drive M&A activity across industries, including manufacturing. In 2020, SPACs represented more than 50% of all IPOs in the US. This year it has increased to 60%. As a result, over 400 SPACs are estimated to have uninvested capital seeking acquisitions—with a ticking timeline requirement to invest the funds within two years from being raised.
This new capital enables development-stage companies to rapidly scale operations and take advantage of emerging market opportunities. SPAC activity in the manufacturing industry will continue across the section as well as in specialty areas such as electric vehicle charging infrastructure, power storage, and 3D printing.
Continued innovation and digital transformation: When asked their priorities for the next six months and over the next 1-2 years, manufacturing executives stated: productivity and efficiency (55%), innovation and R&D (53%), and digital transformation (47%). We expect innovation and digital transformation to be top of mind for executives as they strive to reduce operational disruptions and lower supply-chain risks.
New ways of being: The past year has been a catalyst for companies to advance their digital capabilities. Now, more than ever, digital is at the center of how businesses and consumers procure goods and services. Digital supply chains and digital sales and marketing are critical to manufacturing companies. Executives recognize this shift in behavior and, in looking at the next 1-2 years, 66% of US manufacturers agree that digital marketing and sales is a top business priority. However, not every company is equipped with the capabilities to succeed and keep up with the rapidly changing industry. Forty percent of executives also agree carrying out e-commerce efforts will be a top business challenge, likely pushing those who are struggling to keep up with their competitors to turn to M&A.
Shifting geopolitical and regulatory impacts: The roll-out of the COVID-19 vaccines aided the resurgence of US M&A. North American deal value for the first half of 2021 as a percentage of the total worldwide is the highest for both target and acquisition M&A since 2015. Companies are also looking for opportunities to onshore supply chains as a result of both the pandemic and other global disruptions, such as the Suez Canal block.
Most of 2020 was about playing damage control. During the first half of 2021, executives focused on preparing for the post-pandemic world. With a large majority of Americans vaccinated and preparing to return to work, the new normal is beginning to emerge. Companies must now assess their market strategy and positioning, what's needed to stay competitive in the new normal and whether M&A can help support.
Michelle Ritchie is PwC's US industrial products deals leader