11 March 2020 was the date when the Danish government chose to shut down large parts of society in order to contain the spread of Covid-19. Because of the global shutdown in March, large parts of the business world had to make hurried, difficult decisions and adopt wide-ranging measures to find a way through an environment that had changed drastically in a few weeks. To the M&A market, this meant that the longer-term strategic plans were put on standby, resulting in many proposed transactions being postponed, as uncertainty and the lack of clarity in the outside world made it a challenge for both buyers and sellers to make major decisions, including decisions on the purchase or sale of companies.
Several large, Danish law firms, including Holst, Advokater, experienced a significant decrease in the number of business transactions as activity on the market for business transactions fell by 37.5% in the first half of 2020 compared to 2019.
A record number of M&A transactions in the middle of a global pandemic
The uncertainty surrounding the handling of Covid-19 diminished, and the horror scenario of severe economic recession was not realised. The backlog in the M&A market sent demand and prices skyrocketing, and the market for business transactions made a huge comeback, as activity in the Danish M&A market in the fourth quarter of 2020 rose by 33.3% compared to 2019.
Further, an upturn in the stock markets meant that many of the transactions that had been put on standby in 2020 were resumed and completed, and 2021 ended as a record year in the M&A market with an increase of 46% more transactions in Denmark in 2021 than in 2019, which until 2021 held the record.
Although the record level in 2021 also included several transactions that had been postponed from 2020, 2021 was characterised by several other factors.
Many Danish companies had chosen to scrutinise their business and look at the structure for it to be able to withstand a longer economic crisis. Companies trimmed redundancies, bolstered liquidity with capital injections, expanded lines of credit and withheld dividend distributions to stakeholders.
Therefore, many companies suddenly found themselves with a strong and streamlined business and a solid capital base. At the same time, major trends such as sustainability, gender diversity and digitisation became even more relevant for companies and their strategy, and acquisitions made it possible to realise their strategy significantly faster than by organic growth of the companies. And so, the M&A activity in Denmark in 2022 almost balanced the record high level of 2021.
The rough times highlighted important aspects of the legal environment in Denmark. The Danish legal system is very liberal; it allows expeditious and creative solutions and allows direct access to courts and public authorities. This ensures that technically challenging transactions can be put together quickly, with very low transaction risks, even in uncertain times.
“The backlog in the M&A market sent demand and prices skyrocketing, and the market for business transactions made a huge comeback.”
Further, Covid-19 revealed how extensive digitisation is in Denmark, compared to other surrounding countries. It seemed that Danish companies could more easily adapt when something unforeseen like Covid-19 happens. For instance, Danish companies readily switched distribution channels from physical stores to online trading. Many companies have been quick to do so, but Denmark has performed well above the European average, also in terms of successfully adjusting to remote work and conducting digital meetings. This has made Danish companies very attractive to foreign investors who were previously either reluctant to digitise or who focused on larger companies.
A substantial proportion of M&A in Denmark is therefore driven by companies that are very innovative and able to adapt to new conditions. This has opened the eyes of the international market to the investment potential in Danish companies.
“Covid-19 revealed how extensive digitisation is in Denmark, compared to other surrounding countries.”
In a time of economic turmoil, the Danish M&A market has strengthened
At the beginning of 2023, the short-term economic outlook is characterised by fear of a global economic downturn, rising interest rates and record high inflation in many regions of the world.
The M&A market often tends to slow down during times of great uncertainty or market volatility in the value of investments. However, that can also be seen as an advantageous time for buyers, as valuations become more attractive during such periods. Challenging conditions create opportunities for skilled buyers to achieve better returns and even increase growth. Typically, there will also be less competition for companies entering the market, which creates opportunities for buyers who have funding.
Denmark is therefore well-placed for M&A if companies have carefully considered strategies and the financial resources for making transformation deals. Hence, it is quite possible that unexpected M&A opportunities lie ahead in 2023.
Danish investors and business leaders continue with M&A activities as there allegedly is a definite willingness to run short-term financial risks for achieving a long-term strategy for business transformation and outcome. Many continue to plan corporate deals in a market affected by political tensions, including the war in Ukraine, rising interest rates, steep declines in valuations and continued disruptions to supply chains.
For some industries, the M&A market has come to a stop. For others, e.g., industries with technology and digital/data-driven assets, the M&A activity increases. In 2022, M&A for small-medium sized companies increased and will assumably continue in 2023, as small-medium sized transactions will be easier to complete than bigger transactions given less reliance on financing, lower risk and less regulatory scrutiny.
The prospects for 2023 of course remain uncertain. It is therefore crucial that Danish companies enhance their resilience by means of operating efficiency and keeping costs down so that they are better prepared for the challenges of the future.