Post COVID-19 Business Insights
Active Acceleration: Its Impact On M&As, Digitalization, And Sustainability
The COVID-19 pandemic has had a profound impact on the world, laying down a stark dividing line between “before” and “after.” This sea change has had many ripple effects, changing how we conduct business, learn, and interact with each other on every level — seemingly overnight.
“Active acceleration,” as we are terming this post-COVID “warp-speed” pace, has become the new normal for consumers, companies, and the global economy. To achieve results and meet the needs of an upended world, we have had to actively develop and execute new processes at an unprecedented level of acceleration.
Accelerated M&A Activities
While this period in time has been extraordinarily difficult, it has nevertheless created a number of unique opportunities. In the business world, the implications are vast. Companies are fast-tracking M&As that will better position them to succeed in this changed economy. Not only are we witnessing traditional consolidation-driven M&As, but also non-traditional deals such as cross-sector alliances, special purpose acquisition companies, co-investments with private-equity firms, divestments of coveted assets, deals to secure valuable supply chains, and acquisitions of innovative, state-of-the-art technologies.
Global full-year M&A surged to its highest level in history in 2021, with $5.9 trillion on record, an increase of 62.1% compared to full year 2020, as per data released by Dealogic in December of 2021. According to Bloomberg, 30,640 M&A deals, with an aggregate value of $3 trillion, closed in 2021 — far surpassing any of the prior 20 years. Companies continued to look to transform and innovate across all sectors in a post COVID-19 world, with the Technology sector seeing the greatest activity; there were 260 announced tech deals that were greater than or equal to $1 billion in size during the year, according to year-end 2021 Dealogic data.
“The true opportunities currently reside in M&A to support consolidation and portfolio rationalization and sustainability performance improvement,” says Hardeep Parmar, Kline’s Vice President of Global M&A and Corporate Development. “This will drive innovation and capital spend going forward.” Private equity is gaining a stronger position in chemicals-related M&A, observes Parmar. “Given the experience that these firms have in growing businesses and improving financial efficiency, they are well-positioned to invest in targets that can improve environmental, social, and governance (ESG) credentials, a focus that is becoming more prevalent.” Adds Parmar, “M&As are also providing strategics with the opportunity to rationalize their businesses and turn them around. One example is Johnson Matthey, which historically has served the combustion engine market with catalytic converters and is now exiting the battery material market and looking to build on its Efficient Natural Resources business.”
Parmar is seeing accelerated M&A activity across the board with record multipliers. She is currently following 10 deals in the chemicals and materials space and is aware of consumer businesses planning to consolidate and spin-out brands or build on their medical-equipment platform. As additional examples of this acceleration in M&A activity, Parmar also expects consolidations to take place having to do with compounding and master-batching businesses, particularly in Europe. She is seeing interest in ingredient producers and producers of raw materials for personal care, for products that are sustainable. Packaging is currently witnessing a transformation — not just for sustainability, but also for smart packaging. “This will create opportunities for investors and corporations that are looking for a way to stay relevant in today’s world,” says Parmar. Digitalization and technology platforms are also showing up on her M&A radar screen.
Carrie Mellage, Vice President of Kline’s Consumer Products practice, agrees that the presence of private equity in the M&A world is growing. “I’m seeing a lot more activity and interest from private equity and investment firms in the professional beauty space — particularly in skin care — as opposed to strategic buyers. Not only do I believe this trend will continue, but I think we’ll see some more creative solutions in terms of equity and financing in the years to come.” As an example, special purpose acquisition company (SPAC) Waldencast Acquisition Corp. announced in November 2021 its three-way deal with specialist skincare startup Obagi and vegan makeup brand Milk Makeup to form a multi-brand beauty and wellness platform valued at $1.2 billion. Waldencast, which was founded by two former L’Oréal executives, took the unusual step of forming a SPAC, which allows an entity to quickly put capital together to form a company, list that company, and then find a company with which to merge.
In this post-COVID world, digitalization is also hitting maximum velocity, with the pandemic having sparked an acceleration in the development of and migration to technologies at such a fast pace that what previously might have taken even years to accomplish was achieved in months. The International Telecommunications Union (ITU) reported that approximately 4.9 billion people — or 63% of the world’s population — were using the internet in 2021, as per year-end data. This represented a 17% increase since 2019, with 782 million people estimated to have come online during that period. Internet traffic in some countries increased by as much as 60% shortly after the outbreak, according to the Organisation for Economic Co-operation and Development (OECD).
In this new world, digitalization is literally everywhere. With the pandemic basically flipping the switch to “off” on life as we knew it, it became imperative that the necessary digital platforms and technologies be developed and implemented at a greatly accelerated pace — which, despite the enormous challenges, did indeed happen. On that first Monday that employees around the world began working from home, businesses were already well on their way to transitioning to collaboration platforms and video-conferencing applications. Grocery stores and restaurants rapidly shifted to instituting online-ordering functionality, retail stores launched e-stores seemingly overnight, and pretty much the entire planet jumped to embracing e-commerce. Change and progression are a constant in this digital economy, and companies must — at a minimum — keep up with rapidly evolving technologies at all levels of the organization. The pace of establishing new digital processes, new tools, and new methods of delivering value will only quicken as we go forward.
Accelerated Sustainability Efforts
Spurred by the pandemic, sustainability efforts are also accelerating at a pace previously unheard of. Between 2020 and 2021, sustainability became a mega-trend globally, with a surge in the number of different governments and corporations declaring their intention to become carbon-neutral. The most visible — and arguably most positive — impact of COVID-19 has been a drastic reduction in greenhouse gas emissions. Between global lockdowns and restrictions on non-work and social activities, along with the shuttering of factories and the shift to working from home, air pollution and greenhouse gas emissions fell dramatically around the world. Global energy-related CO2 emissions fell 5.8% in 2020 — the greatest decline in history, according to the IEA (International Energy Agency). The largest share of the decrease was primarily due to the sharp drop in emissions from transport. Societal changes driven by the pandemic have also meant less use of natural resources such as oil and coal, which contribute largely to the greenhouse effect. While these numbers are now climbing again, scientists — and the world — were given an unprecedented view of results that would have taken regulations years to achieve.
While sustainability and decarbonization initiatives have become increasingly critical in all industries, the Energy sector is particularly feeling the heat. The desire of many governments to “build back better” in the aftermath of the COVID-19 pandemic has accelerated the advancement of clean solutions like electrification, synthetic fuel, green hydrogen, and CCUS (carbon capture, utilization, and storage). Financial investors’ sharpened focus on sustainability, plus pressure from consumers, who have become increasingly vocal, have further pushed the pace.
“Although many applications for oil and gas can be replaced by alternative energy sources, some applications such as long-distance shipping, aviation, and industrial processes requiring high temperatures will continue to need fossil fuels with complementary technologies to abate the associated carbon emissions, as electrification by itself will be inadequate,” says Milind Phadke, Vice President of Kline’s Energy practice. “As a result, not just electrification, but synthetic fuels, green hydrogen, and CCUS will each play a vital role along our collective path to net-zero — and these areas are where the opportunities lie.” As these technologies become more prevalent, we will see a corresponding change in lubricants requirements. “The equipment necessary to support electrification, synthetic fuel, green hydrogen, and CCUS will produce new markets for lubricants, which will further add to the opportunities,” adds Phadke.
While the COVID-19 pandemic has resulted in countless negative — and unbearably tragic — changes in our world, it has also set in motion many immediate and long-term positives, several of which are described in this article. The pandemic has revealed that as soon as there is a strong enough stimulus, change can happen. This has led, and will continue to lead, to remarkable innovations and opportunities.