Merger and acquisition (M&A) transactions are increasing – in frequency and complexity, according to Aon’s M&A C-Suite report and insights. Dealmakers have rarely experienced a period like this; each quarter since late 2020 seems to set new records in terms of global deal value or volume, as recovery in M&A activity from the lows of the COVID-19 pandemic continues. In this episode of “On Aon,” host Julia Olivares, Head of Internal Communications, Aon Australia, is joined by Aon’s Global Co-CEO of M&A and Transactions Solutions Alistair Lester for a discussion about Aon's M&A and Transaction Solutions and Aon’s recent report. Together they review the key values and risks associated with M&A, the main factors that have contributed to the growing complexities in the M&A space and how the ways in which dealmakers define and calculate “value” have evolved.
Merger and acquisition (M&A) transactions are increasing – in frequency and complexity, according to Aon’s M&A C-Suite report and insights. Dealmakers have rarely experienced a period like this; each quarter since late 2020 seems to set new records in terms of global deal value or volume, as recovery in M&A activity from the lows of the COVID-19 pandemic continues. In this episode of “On Aon,” host Julia Olivares, Head of Internal Communications, Aon Australia, is joined by Aon’s Global Co-CEO of M&A and Transactions Solutions Alistair Lester for a discussion about Aon's M&A and Transaction Solutions and Aon’s recent report. Together they review the key values and risks associated with M&A, the main factors that have contributed to the growing complexities in the M&A space and how the ways in which dealmakers define and calculate “value” have evolved.
Additional Resources:
Don’t miss the full M&A C-Suite series, and press release.
Find more M&A and Transaction Solutions insights here.
ICYMI, episode 8 featured Lewis Lee, CEO of Aon’s Intellectual Property Solutions, discussing intellectual property valuation. Listen here.
Tweetables:
“We’re bringing the huge capital of the insurance industry to bear in a slightly different context by deploying insurance instruments in M&A deals.” — Alistair Lester
“These are issues that are affecting policies, whether they’re doing a multi-billion-dollar transaction or a single figure, million-dollar transaction.” — Alistair Lester
“We believe ESG due diligence will become as important as financial due diligence in the very near future.” — Alistair Lester
Voiceover:
Welcome to "On Aon," a podcast featuring conversations between colleagues on, well, Aon. This week, we hear from Alistair Lester about Aon's M&A and transaction solutions. And now this week's host, Julia Olivares.
Julia Olivares:
Hello everyone. My name's Julia Olivares. I've been a colleague at Aon for 11 years serving most recently as the head of internal communication in Australia. I feel incredibly fortunate to be able to share the stories of our firm, our people and our clients through our internal communication channels. With me today is Alistair Lester. Alistair joined Aon in 2017 and currently serves as the Gglobal Cco- CEO of M&A and Ttransaction Ssolutions. Prior to this, Alistair was for many years our EAMEA CEO of M&A and transaction solutions. Today we're really fortunate to have Alistair bring his unique insight to this topic, which is the recent M&A C-suite study. Thanks for being here today Alistair.
Alistair Lester:
Julia, thanks for having me. It's fantastic.
Julia Olivares:
Before we go dive straight in, I was hoping to warm things up with a quick question. I know you operate under an ethos of securing investment enhancing returns. Can you tell me a little bit about your role at Aon and maybe a bit of a primer on M&A for those who are less familiar with it so we can understand the value and risk of M&A?
Alistair Lester:
Yeah, of course Julia. I'll be delighted to. So I, as you said, I've been back at Aon now for four years. I'm a returnee to Aon. So I started my career at Aon and I left after a few years and I realized the error of my ways and returned here some years later. So I'm a returnee. And I think that probably frames exactly the answer to your question, right? So I've been in and around M&A for many, many years. I was one of the early members of the M&A team at Aon in Europe way back in the late 1990s. And actually when I returned in 2017, I realized that there was a huge opportunity for us to accelerate and evolve the business to reflect the way that Aon had changed over the years, because actually the M&A business of Aon really hadn't changed as much as the firm had.
Alistair Lester:
And what we're looking to do frankly, is to bring everything and anything that the Aon organization has to bear to help clients who are doing M&A transactions or other forms of event- driven transactions. We're probably best known for insurance due diligence, or excuse me, pension due diligence. And in recent years, rep and warranty or warranty indemnity insurance. Rep and warranty insurance as it's known in the U.S. and warranty indemnity insurances as it's known in much of the rest of the world has really grown to be a very substantial part of our business, but there is so much more that we have in Aon and therefore that we can bring to bear in M&A transactions to help our clients. And look, there's essentially two sides of what we do. One is a due diligence advisory practice. We have due diligence capabilities across cyber intellectual property, commercial intellectual property not legal, people, so retirement benefits, talent compensation, et cetera, insurance of course, and more recently developing an ESG value proposition and a working capital and credit value proposition.
Alistair Lester:
So multiple due diligence advisory work streams. And then the other side of the fence, the other side of the coin if you like is what we do with bringing building insurance instruments to be deployed into M&A transactions which either have or either or both enhance the returns of a transaction, enhance the value of a transaction, or have some positive impact on the capital structure of the deal that's being put together. So bringing the huge capital of the insurance industry to bear in a slightly different context to traditionally by deploying insurance instruments in an M&A deal. So those are two sides of the business, and it's grown incredibly rapidly over the last three, four years, although it still has a long way to go.
Julia Olivares:
Alistair, that's a fantastic overview and a bit of an introduction to people less familiar with M&A. And I love that you're a returning colleague. In Australia we call that a boomeranging employee, because you've come back to us, and we're fortunate to have you. I'm hoping I can chat a little bit about the growing complexity that we're seeing in M&A space. Can you explain the factors that have been contributing to this over the past few years?
Alistair Lester:
Yeah, of course Julia. I'll have a go. So I think there's probably three main themes that we see that we've experienced and our clients are probably experiencing which are globalization. And again, globalization is a theme which is not an M&A issue, it's a societal issue, it's a political issue. Digitalization, this rapid digitalization of our economy over the last two decades in the beginning of the 21st century. And then perhaps more recently ESG. And all of these things are deeply linked together actually when you think about it. Globalization, digitalization, and ESG all intero play and interact with each other, but they're also three themes in their own right. The fascinating thing is with globalization, and one thing I should say is those are issues which we believe are affecting parties, whether they're doing a multi-billion dollar transaction or a single figure million dollar transaction. For different reasons and in different ways but it's probably true to say that 20 years ago there were relatively few 10, 20, 30, $50 million transactions that were cross border multinational and or globalized in some way, be that in the supply chain or be that in the direct activities of the business.
Alistair Lester:
And now almost every business has got some cross- border exposure, be it customer, be it a supplier, be it operations, whatever it might be. And that in itself, those globalized activities are increasingly reliant on a digital ecosystem, a digital infrastructure to be able to operate. And then of course you overlay that, which I'll perhaps talk about a little bit later, with some of the ESG themes and you get to a sense of the complexities that you're talking about.
Julia Olivares:
What's coming through really clearly to me is how independent those are, but also very much interwoven and the impact at all levels. How have these factors that contributed to the M&A complexity forced you to rethink the way you view M&A?
Alistair Lester:
Yeah. So listen, we're very fortunate we act for some fantastic clients and it's the clients who really challenge us to think differently. Of course, we can get a sense of what's going on around us, but actually it's the clients who really help us to think differently. But if you break those three things three down again, globalization I think means that you need to have access as a client, you need to have access to the local insights and local capabilities. The days as I say of doing a transaction which doesn't in some way have some sort of global or international cross-border aspect to it is in the past, and you do need partners and advisors who can help you understand some of the nuances of local insights and local issues.
Alistair Lester:
I think digitalization is a fascinating one. And it's not just in digitalization, but one of the things we've been striving to do. Aon of course, is well known for helping clients understand, manage, mitigate, and transfer risk in certain situations including M&A deals. But actually we're also becoming increasingly adept atto helping clients understand the other side of the coin to risk, which is value. And if you look at some of the work we do in the cyber, in the IP space, in our digital practice, being able to help clients understand how to generate greater monetized return, greater value out of their intangible assets, out of their intellectual profit, how to make sure that they can really generate greater upside and value out of the digital performance of the target businesses, the businesses they're buying as well as of course identifying and managing and mitigate the risk of that business and of the transaction is been a real shift for us.
Alistair Lester:
And look and I think we look at ESG, that for me is real evidence of there is a fundamental shift and that there already has been. The digitalization has been driving a fundamental shift, but there has been a fundamental shift in the way that companies are being valued, whether that's in the public market context or in a private M&A market context, there really is a fundamental shift. And if companies are being valued differently, then frankly they're being financed differently. And the way that finance is being raised to enable companies to buy businesses is already changing, but will continue to change these even further because of some of the shifts I've just been talking about.
Julia Olivares:
I love the positioning of it as risk being one side of the coin value being the other. And I know you and the team have worked really hard on the recent M&A C-suite study, which has been a fantastic document and really, really valuable for our clients. Can you talk through some of the key takeaways from the study?
Alistair Lester:
Yeah, of course Julia. And actually probably out of the blocks, I'd say that actually the headline of the press release that we put out for the study probably captures one of the big messages really well, which was we believe ESG, if it isn't already, ESG due diligence will become as important as financial due diligence in the very near future. Look, financial due diligence is always being the bedrock of any analysis you do about a company you're going to buy or sell. It tells you about the financial performance. It gives you the data to enable you to drive evaluation methodology and evaluation model. And we think ESG is going to get to a similar place, right? It's moving so fast. There is a lot of work to do because ESG is so... The definition of ESG can be so broad and the interpretations of what it means for different situations can be really broad as well.
Alistair Lester:
But we certainly think that ESG as a leading priority piece of work that needs to be really bespoke to individual circumstances is going to become absolutely critical in future years. It's no longer a box- ticking exercise. In fact, it's probably moved faster through being something that people didn't have to consider the context of M&A deal to something that became relevant, but perhaps a box- ticking exercise to something that, as I've said is probably one of the if not the most important aspect of due diligence, faster than any other development in the due diligence and the pre-deal insights that I've seen in my 25 years in the M&A space. So I think that's one thing. I think the second thing is as I've already touched on, is this definitional issue.
Alistair Lester:
There's such a broad definition of what ESG is and what it includes, but deliberately that as a result, people have really got to spend time before they do deals understanding from an ESG perspective, what is relevant to them and to the target company in any given specific situation and really contextualize the issues that are relevant as they go into a deal. And I think probably the last point I'd make is around I've already reference this point about intangible assets and how there's going to be a change in how businesses are valued and therefore financed. And I think the digitalization journey of the last few years has really driven a huge explosion in intellectual property in business. And as a global reference point, over 80% of the S&P 500, the value of the S&P 500 is now made up by companies with intangible assets compared to 25, 30, 40, 50 years ago, it being 90% companies based on tangible assets.
Alistair Lester:
And that really just is reflective with what's going on in the whole economy. And it's really important to understand, again, the commercial opportunities that go with digitalization, how do we help our clients think about upsides through digital strategies and critically, how can we potentially help structure new instruments and new solutions which help clients to generate more value out of things which previously have been viewed as being difficult to extract value from. And intellectual property and patents for example, is a really good example of that. Patents have traditionally being seen as downside legal protection against someone infringing and or stealing your intellectual property. Now they can be really turned around the other way and used as collateral in financing to unlock means of financing your business and financing M&A in a way that they never could be even 2, 3, 4 years ago.
Alistair Lester:
And that's just at the beginning of that journey. So look, a whole load of things in there, but ESG is an overwhelming theme and how that's going to change M&A was a really strong theme that came through in our report. And then this whole idea of digitalization and how every transaction, we had a client I think say every transaction is now a digital transaction. Even if it's perceived to be a really old industry business, that old industry business is essentially reliant on a digital infrastructure to be able to operate and trade and transact. And I think that's a huge shift in the last five to 10 years.
Julia Olivares:
We're living in a very different world now than we were even two years ago for many, many reasons. And Alistair, you talked about COVID accelerating digitalization, but what other impacts has COVID had on the deal landscape?
Alistair Lester:
Well, so Julia, you're absolutely right. I mean, it's been an extraordinary 18 months, isn't it? And I think that's one of the things that, and again, it's all linked. So COVID we think clients seem to think has probably accelerated certain things by 10 years, right? And so as a result, you've got clients who are looking to make sure that they are being part of this accelerated landscape. I mean, a huge boom in tech M&A, huge increase in valuations of certain of certain tech- driven and digital- driven assets. And that's been a fairly obvious consequence of everything we've been through for the last 18 months. I think the other interesting thing was just really activity. So it was fascinating how the breaks came on in terms of deal activity and clients looking to do M&A deals certainly in Europe in Q2 and early Q3, 2020.
Alistair Lester:
And it really felt a little bit like, for those old enough like me to be around then, like the global financial crisis, right? It felt similar to that albeit clearly it was a different challenge that had to deal with. But deal flow completely fell off a cliff because everyone was busy focusing on the businesses they owned, making sure they understood the impact of the situation on what they already owned, rather than looking to go through M&A processes. And then as we got into second half of Q3, 2020, and ever since frankly, it has been an incredibly busy period. And why? Well look, the world proved it could be resilient in the context of COVID economically, not without its challenges, but in the context of COVID. The world, I think has an enormous amount of dry powder in terms of equity that needs to be put to work.
Alistair Lester:
There's a huge amount of capital looking for returns and yield, corporate balance sheets have more cash on them than they've ever had before. And one of the things that needs to be done with corporate cash is you either give it back to your shareholders or you have to spend it on M&A. I mean, that's basically the two choices. So look, COVID I think has just really accelerated a whole load of things that were happening anyway and really intensified it. I would say we've seen a mild slow down, but only mild, in the last four to six weeks but I think that's possibly just because there was a significant amount of indigestion in the system. The system's been running so hot for such a long time I think it had to take a pause at some point. But then just in the last week or two, we're seeing that start to really pick up again.
Alistair Lester:
So where will it end? We don't know. Possibly one of the big questions around that is what will the impact be of government funding getting eased in various ways? But we've been living in a period of significant government intervention in the financing market for over a decade since thea global financial crisis. So however that works is going to have to be done in a very sensible way over a reasonably long period of time. So we'll have to see the impact in due course, but right now it continues to be huge volumes in the M&A market. And sectorally, TMT tech is obviously huge and others that might be a little bit surprising.
Julia Olivares:
I want to know about the ones that are a little bit surprising.
Alistair Lester:
I thought you might say. So look, so one of the ones we've seen in Europe has been food and beverage, right? And we've seen a real acceleration of food and beverage transactions over the last few months. If you try to put your finger on it, there's probably a range of reasons, but one of the reasons we think is actually being, again, it comes back to ESG as underlying shift in the way people eat, how people think about their diets or an increasing shift away from an overtly meat- based diet to more plant- based. I think that's driving some M&A, because anytime there's a shift in societal behavior or trends, then that drives M&A, right?
Alistair Lester:
Because people are either trying to get ahead of it or they're trying to play catch up with it. So I think food and beverage has been one. I think the other one we've seen a lot of activity in and we'll see more is in life sciences. I think the work that the global life sciences and farmer industry has done to help us all manage our way through COVID I think is really given a, pardon the pun, shot in the arm for that industry, right? And it's really rei enforced global confidence in that as an industry, our ability to innovate at scale and develop new solutions for global health problems. And I think that in turn will now drive a further the period of M&A in the life sciences space.
Julia Olivares:
Alistair, I can't thank you enough. This has been such a fascinating session from an overview of M&A to understanding how truly integrated it is with what's happening globally, politically, socially, the sort of M&A's everywhere. I'm hoping before we let you go I can squeeze in one final question, and this is a little bit more personal just to help our listeners learn a little bit more about you, but I'd love to know what's next for you at Aon?
Alistair Lester:
Julia, listen. I've just been asked to take on this global role, which is fantastic. Co-leading global M&A with Gary Blitz out of the U.S. And I think the exciting thing for us is that Aon's changed so much over the last few years. And as I said right up front, the M&A business has been changing, but perhaps not changed as much as the rest of the firm.
Alistair Lester:
And look, I'll be honest enough to say right now, I think if you asked our colleagues in Australia or Japan or Latin America or Germany or the U.S. what we do in M&A to help our clients, you'd get a range of different answers. And certainly if you asked our clients the question, you'd get a range of different answers. And we want to move very fast to make sure that the range of answers is smaller and the breadth of our value proposition is really, truly understood, and the value that we can bring to help clients doing M&A is really appreciated on a global basis. And I think we're on a journey and we've got a long way to go, but we're excited out where we want to get to.
Voiceover:
This has been a conversation "On Aon " and important topics in M&A. Thank you for listening. If you enjoyed this week's episode, tune in in two weeks for discussion of Aon's work furthering gender equity. To learn more about Aon, it's colleagues, solutions and news, check out our show notes and visit our website at aon.com.