2022 M&A Outlook: Top Trends to Note | Top Executive Search Firm | Cowen Partners

      2022 M&A Outlook: Top Trends to Note

      After a record year in which global dealmaking crossed the $5 trillion threshold, expectations are high for 2022. Driven by abundant low interest debt and private equity action, deal value and volume peaked at historic highs in 2021, but the question now is what next? 

      While it’s unlikely that new records will be set in 2022, economists and analysts agree that the data indicates another supercharged year. Yes, pandemic-induced tailwinds are still buffeting the market, and there are enduring concerns over supply chain disruptions, anticipated interest rate increases, new COVID variants, and other macroeconomic uncertainties. 

      However, the conditions that fostered such vigorous dealmaking activity in 2021 have not dissipated. In addition, pent-up M&A demand coupled with an impressive cache of corporate dry powder and greater competition for assets (especially in tech) has set the stage for solid M&A performance in the new year. 

      Sky-high valuations 

      Apart from the record activity recorded in 2021, the year was also notable for its megadeals. According to Refinitiv, publicly-disclosed deal value was $5.9 trillion, and this included 130 megadeals – acquisitions worth more than $5 billion – which contributed to the historic market. 

      Preliminary indications are that we will continue to see outsized deals with mega valuations. This is partly the case because of the unusually high incidence of topping bids and contested transactions. As Morgan Stanley notes, “corporate acquirers have been aggressive in using M&A to implement their strategies,” encouraging larger deal values. 

      KPMG, in a survey of 350 US execs, finds that high valued targets may have a significant impact on deal activity in the new year. Elevated valuations could impact deal activity the most, according to 61% of respondents. This is followed by other economic variables like overall liquidity (56%) and fiercely-contested but scarce high-value targets (55%).

      In such a high-priced market, buyers will need to be intrepid in their deal hunting to unearth opportunities that produce returns. “Valuations are very high … buy things that fit your strategy and have the return opportunity to recover the high price,” says Kathy Wagner, CFO at IT management firm Kaseya. 

      SPAC activity and corporate dry powder

      According to Morgan Stanley, a record-breaking trend of sponsor-backed transactions and an enormous cache of unspent SPAC capital will set the tone for a positive 2022. 

      Financial sponsors were involved in 32% of global deal volume in 2021, roughly 6% higher than the previous record set in 2020. During that time, sponsor-backed acquisitions doubled in volume, driven mainly through take-privates of public companies where average deal size topped $3 billion. 

      Morgan Stanley anticipates continuing financial sponsor activity in the new year. According to Bill Sanders, Global Head of Financial Sponsors at Morgan Stanley, “while perhaps not at 2021 levels, we expect financial sponsors to march forward putting capital to work, even if financing markets tighten moderately this year.” Therefore, mild rate rises and ample supplies of dry powder will continue to support elevated PE activity levels. 

      Likewise, SPAC transactions should continue at elevated levels, although most likely not at the record heights experienced in 2021. The previous year saw strong SPAC dealmaking, which saw them account for one in five US M&A transactions. But the frenzied activity has not left these companies spent out. 

      Instead, SPACs have a combined $160 billion at their disposal, spread out over 550 SPACs. Much of that capital will also be expended shortly, given that these companies are required to deploy their resources within two years. 

      Vertical integration 

      A distinct feature of the 2021 M&A market was an appetite for vertical integration, as companies aimed for greater self-sufficiency across their supply chain. This is unsurprising considering last year’s acute sourcing and procurement challenges facilitated by COVID-tailwinds. 

      To avoid the uncertainty and frustration of a fragile supply chain, more companies are leveraging M&A to build resilience against supply chain disruptions. PwC notes that 2022 “will bring more vertical-integration deals, both upwards, to secure key raw materials or components, and downwards, to control how products are distributed.”

      Transactions are expected to focus on exploiting onshoring or nearshoring opportunities to combat the risk of lengthy sourcing chains and build agility into their processes. 

      Divestitures and demergers

      Conversely, other companies are tightening operations and cutting off underperforming businesses as they look to reorient corporate goals or pursue agility in the aftermath of the pandemic. 

      While some companies found that they fared better due to their size and scale, others are isolating smaller and more efficient operations as a key M&A objective. JP Morgan reports that divestiture activity, including split-offs and spin-offs, reached $3 trillion in 2021, outpacing the previous record of $2.5 trillion set in 2015. 

      Companies like IBM, Johnson & Johnson, Daimler, Toshiba, and General Electric recently carried out some corporate pruning through divestitures or demergers. The expectation is that the forces behind this global boardroom shift – shareholder activism, operational agility, nimbleness in the face of disruption – will continue into 2022, making more divestitures likely. 

      Sustainability/ESG 

      Sustainability is steadily becoming a central theme in M&A strategy. As a result, environmental, social, and governance (ESG) factors are increasingly considered during due diligence and are forming critical criteria on which deals succeed or fail. 

      PwC reports in its 2021 Global Private Equity Responsible Investment Survey that over 50% of respondents said they either pulled out of or rejected a potential investment due to ESG concerns. Considering stronger global rhetoric and active commitments amongst PE firms and funds towards reducing carbon emissions, there are substantial expectations that this trend will continue. 

      ESG action should not be limited to carbon-heavy sectors either. PwC says they expect greater sustainability-themed deals in industries exploring a transition to new business models, such as renewables investment and the tech sector, where sustainable energy storage is gaining ground. 

      Increased regulatory scrutiny 

      Lastly, growing attention from regulatory agencies may create challenges for dealmakers in 2022. The previous year saw a tightening regulatory environment, especially concerning deals that attracted the scrutiny of antitrust agencies. 

      In the US, the Federal Trade Commission (FTC) and the Department of Justice’s Antitrust Division (DOJ) raised several challenges, including objections to the deals between NVIDIA and ARM, AoN and Willis Towers Watson, and Penguin Random House’s offer to acquire Simon & Schuster, says Cleary Gottlieb. 

      The same trend has been noted in the United Kingdom, where the Competition and Markets Authority has exerted its merger review powers, most recently in relation to tech and pharma deals. Likewise, in Europe and Asia-Pacific, antitrust investigations are pending or ongoing, or industry-specific regulations are being passed to prevent monopoly and other anti-competition deals.

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