Companies across multiple industries including the Big Tech will go shopping for competitors over the next five years as extended lockdowns amid Covid-19 and other pandemic-related dislocations have squeezed the profit margins of many businesses globally, leading to record levels of corporate defaults, a new report said on Monday.
The economic shock is poised to result in a wave of mergers and acquisitions (M&A) as stronger companies acquire weakened rivals, technologies, and assets at bargain prices, said the report titled 'The great shakeout' by leading global management consulting firm Kearney.
"Over the next five years, the influence and size of companies and industries already wielding sizable market share are likely to grow as struggling competitors are eliminated during this great shakeout".
Private Equity Play Increases
In the meantime, with more than $1.5 trillion in capital and a sea of financially weakened targets made available as a result of Covid-19, private equity groups have deployed their record levels of dry powder in the months following the pandemic, making more than 5,500 deals in the first nine months of 2020.
Stronger companies in sectors benefiting from the pandemic -- such as grocers, e-commerce and digital companies -- are likely to seek growth and additional capabilities by acquiring rivals or new technologies to improve business efficiency.
Between January and May 2020, tech giants such as Alphabet, Amazon, Apple, Facebook and Microsoft announced their highest number of acquisitions since 2016 -- a total of 19.
"In the third quarter of 2020, both big technology companies and other players continued technology deals, with transactions surging to more than $200 billion -- levels not seen in two decades," the report noted.
Such acquisitions are enabling companies to position themselves in areas likely to grow during and after Covid-19, such as automation, fintech, digital services, and food delivery.
The activity is further spurred by both the availability of attractive valuations and rising fears of tighter M&A regulations.
For example, Facebook spent $5.7 billion on a 9.99 percent stake in India's digital platform Jio, Microsoft acquired IoT and cybersecurity company CyberX, and European food delivery platform Just Eat Takeaway agreed to acquire the United States' GrubHub for $7.3 billion.
Breaking up Giants
"Indeed, tech start-ups that are unable to compete with the giants will become more vulnerable to acquisitions as the latter seek to minimize competition, improve capabilities, and boost revenue streams," the report mentioned.
Obstacles to Covid-induced M&A activity are also starting to materialize, said the report, driven by a mix of protectionism and anti-monopoly sentiment.
In October, a congressional investigation into big tech companies recommended breaking up giants and stronger antitrust laws, just before the US Department of Justice filed an antitrust lawsuit against Google.
"Regulatory scrutiny is intensifying elsewhere as well, with antitrust probes against tech giants, including Facebook, Apple, and Amazon underway in the EU, Australia, Brazil, and Canada," according to the Kearney report.