Trends in M&A and the impact on SAP customers

[benmcgrail]

In May 2020, shortly after the first coronavirus lockdowns, I wrote this article about the impact of the pandemic on the economy, specifically its impact on mergers and acquisitions and what that might mean for SAP customers around the world.

At the time, there was a widespread uncertainty with deal volumes down by over a third compared with a year before as business leaders focused all their attention on damage limitation and survival. However, a number of indicators seemed to suggest that a significant rise in M&A was on the horizon. Private equity firms were sitting on record levels of unallocated capital (“dry powder”), valuations were down, business models were changing and many companies were looking to sell assets to raise cash. Expert opinion was unanimous: while deals would stall in the short term, there would follow a tidal wave of M&A activity.

This is indeed what happened. M&A levels dropped sharply in the first half of 2020, recovered quickly in the second half of the year and then grew further the following year. PwC reported that there were 65,000 deals in 2021, a record number.

Why was this important for those of us working in SAP? Firstly, the general economic uncertainty, with some industries such as travel and retail particularly badly affected, meant that longer term investments in technology such as an S/4HANA implementation were at risk of being postponed or cancelled. Secondly, a wave of acquisitions and divestments would logically be followed by urgent programmes to migrate, merge and separate enterprise-wide applications like SAP. Based on our experience at Xmateria, both of these predictions have come true.

Three years on, the backdrop of global economic uncertainty remains. While most of the world has moved on from the direct impact of the pandemic with lockdowns and restrictions largely a thing of the past, indirect consequences such as inflation and supply chain disruption are still with us, and geopolitical instability, largely because of the war in Ukraine, has increased. M&A levels, while not hitting the highs of 2021, look to be remaining relatively strong, with short-term risks balanced by longer-term opportunities and most businesses not expecting to delay deals.

However, companies are being much more careful about where they invest. Almost all businesses (97% of CEOs who responded to the EY CEO Outlook Pulse study) have altered their investment plans in response to the war in Ukraine with significant numbers relocating assets or exiting businesses completely; divestments or closing down of businesses in Russia being an obvious example. EY devotes a whole chapter in their study to “M&A between friends”.

Looking very specifically at our own customer base, over the past 18 months we have seen both divestments of non-core businesses (almost always to private equity) and acquisitions of entire smaller businesses to create a footprint in new geographies or lines of business. Of course, these two trends often go hand-in-hand: divestments to raise cash followed by strategic acquisitions.

Returning again to SAP, this has meant carve-out projects of single or multiple companies from SAP ECC or S/4HANA and data migration projects into SAP, often from non-SAP legacy environments. Therefore, while much of the conversation within SAP teams is understandably about the journey to S/4HANA, it would be a good idea for those teams to also talk to their businesses about their plans for M&A and plan accordingly.

In my next article, I will dive into this in more detail. In “What is a SAP carve-out”, I will look at the characteristics that define SAP carve-out projects (and distinguish them from standard data migrations) and the business scenarios that require them, and I will explain what you can do ahead of time to prepare for a separation of your SAP landscape. Then, in the third and final article in this series, I will come back to the topic of S/4HANA and explore the challenges and options for data migration.

[sean_dsilva]

Good piece, Ben. Looking forward to your next article!