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1st-time acquisitions of digital businesses expected to continue in 2021


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Banking Essentials Newsletter: September Edition

1st-time acquisitions of digital businesses expected to continue in 2021

Corporations that never before acquired businesses in the digital space rushed to purchase ventures in the internet and e-commerce categories last year, a trend analysts expect to continue in 2021 as buyers target deals that bolster their online presence.

Total deal value announced globally by first-time strategic acquirers of digital businesses reached $34.3 billion in 2020, up from about $25.5 billion in 2019, according to 451 Research's M&A KnowledgeBase, which tracks tech transactions as they are announced. 451 Research is part of S&P Global Market Intelligence.

Michael Hill, an M&A research analyst with 451, said the deal value in 2020 represents more than 245 transactions struck by first-time digital buyers, up from more than 142 first-time deals in 2019.

Hill said first-time deal-making in the digital arena should remain robust through 2021 as consumer behaviors reshaped by COVID-19 stick and companies look to acquire assets that help them adapt to growing digital trends.

First-time corporate acquirers worldwide were particularly active in the internet and e-commerce sector, targeting companies involved in classifieds, services, news and games. In some of those subcategories, such as classifieds and news, a single large deal drove valuations. Adevinta ASA's pending acquisition of eBay Inc.'s classified unit, for instance, pushed the classified group to the largest subcategory targeted by first-time acquirers by total value in 2020, at $8.87 billion. Similarly, investment holding company New Wave Holdings Ltd.'s deal to take Chinese online media company SINA Corp. private drove the aggregate value for the internet news category to $2.61 billion.

Nestlé SA's $950 million purchase of meal delivery startup Freshly Inc. marked the largest deal in the services category, which saw nearly $3 billion in aggregate deal announcements by first-time acquirers in 2020. Communications services also reported nearly $3 billion in aggregate deal value, with Next Private's offer to purchase telecommunications firm Altice Europe for $2.95 billion making up the entirety of that category.

John Freeman, vice president of equity research with CFRA who covers internet and enterprise software, said the pandemic and associated national lockdowns in 2020 accelerated trends in areas such as cloud computing, leading many legacy companies that had been reluctant to disrupt themselves digitally to consider deals in the digital space.

Some companies are pursuing deals to compete more effectively, reach more customers and lower costs, while others are taking a chance on a promising digital venture out of economic necessity, he said.

"The pandemic has forced companies to adapt faster than they would have," Freeman said.

Future deals will depend on the financial wherewithal of a specific company and market conditions, but there is no question corporate buyers will pursue digitally inclined ventures as they initiate or expand digital efforts and footprints, said Scott Kessler, global sector lead for technology, media and telecommunications at Third Bridge.

"I think the reason for that is No.1, it increases their growth opportunities, and No. 2, I think they look at it as kind of a way potentially to drive efficiencies," he said.

Kessler also said companies are open to buying up digital businesses as an opportunity to be innovative and appeal to customers and other stakeholders alike. Some companies may scout firms not necessarily core to their business but in which they see an opportunity to position the ventures for better growth, he said.

"I expect these companies to be more open-minded, more aggressive when it comes to these types of deals, especially given the current market environment," Kessler said.

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