Last year was like no other for global M&A. Marie Kemplay examines whether the record-breaking run can continue.
It is difficult to find adequate superlatives to describe last year’s mergers and acquisitions (M&A) markets, which globally hit $5.9tn of deal volume — substantially higher than the previous $4.2tn record in 2015, according to Refinitiv data. Plenty of M&A bankers have been happy to have a go, variously describing the year as “insane”, “amazing”, “extraordinary”, like a “rocket-ship to the moon” and “frankly, a little hard to keep up with”. Either way, all agree it was an “unprecedented” year.
Broad-based market
Matt Toole, director of deals intelligence at Refinitiv, says: “It was the perfect storm of conditions. I’ve never seen drivers so broad based. Usually, it may be one or two strong sectors, some really large deals or a regional story; this was across the board.”
Although US deals led the charge, up 82% year-on-year, European M&A increased by 46% and Asia-Pacific by 48%.
What began as a bounce back from mid-2020’s M&A slump has developed into something far more substantial, powered by multiple tailwinds.
Jonathan Klonowski, research editor for Europe, the Middle East and Africa at Mergermarket, says: “The economic conditions have been a great incentive for companies to pursue deals: healthy stock markets, low interest rates and easy access to capital. And investment has been boosted by private equity laden with dry powder, as well as a spike in special purpose acquisition company (SPAC) deals.”
Ready capital
Private equity-backed deals accounted for 20% of activity last year — an all-time high. In addition to substantial capital reserves at private equity funds, bankers also point out that the broader financial sponsor ecosystem continues to grow. Dirk Albersmeier, global co-head of M&A at JPMorgan, says: “The sponsor universe has grown substantially. Family offices have become bigger and more professional. There are new subgroups, like core-plus funds, infra funds and so on, so there’s a lot more capital ready to be invested.”
Late 2020 and early 2021 also saw a flurry of SPAC initial public offering (IPO) listings in the US. Although that trend slowed in the second quarter, it nonetheless created a substantial wall of capital. SPAC deals accounted for 10% of activity during 2021.
Positive drivers persist
The multi-billion-dollar question now becomes whether such high levels of activity can persist. Certainly, many positive drivers remain.
Returning to the SPAC markets, Mark Shafir, global co-head of M&A at Citi, says: “There are still a lot of SPACs, with over $150bn in buying power, looking for deals. There is a big cliff coming up, starting at the end of this year, for the SPACs that came to market in late 2020 and early 2021. Between the fourth quarter of 2022 and the first quarter of 2023, around 340 of these deals will expire. So, that’s going to put pressure on people to try to get deals done.” To put this into context, there were 444 SPAC IPOs listed on US stock exchanges in 2021, according to White & Case.
There are still a lot of SPACs, with over $150bn in buying power, looking for deals
Although the vast majority of SPAC IPO listings have happened in New York, capital has been spilling into other markets, with US-raised SPACs acquiring targets in other regions. Samson Lo, head of Asia M&A at UBS, expects SPACs to be a significant driver of Asian M&A during 2022. “The region will continue to benefit from all of the de-SPAC activity in south-east Asia,” he says. “I think there will be a lot more south-east Asia targets.”
Phil Adams, managing director and head of global technology at Houlihan Lokey, observes that “we do increasingly consider for European businesses whether there is a relevant SPAC, particularly on the US side — it’s become part of the discipline”. However, he adds that “in Europe, so far SPACs haven’t been a huge factor in M&A, but it will be interesting to see how that develops”.
Some 36 SPACs listed on European exchanges in 2021; a record high, but a tiny fraction of what the US markets produce. There is speculation whether more European SPACs will list this year, although many feel the European market is unlikely to expand considerably, with one banker suggesting: “In Europe, we have 35 SPACs. But 35 is a healthy number; I can see 35 companies where SPACs make sense. I can’t necessarily see hundreds.”
Strategic shift
In addition to plentiful capital, market participants also suggest a broader strategic shift is driving significant corporate deal-making. “M&A [has become] a more important element of corporate strategy than it has ever been before,” says Mr Albersmeier.
In the wake of Covid-19, many businesses are seeking to rapidly digitalise. Anu Aiyengar, global co-head of M&A at JPMorgan, says: “One of the significant things driving activity is companies having a strategic need to innovate, digitise and be technology-enabled in their businesses. Covid was [something] that all businesses have had to face. It poses questions about how they are going to compete in a new environment.
“We saw a lot of companies in other sectors acquire technology businesses. It wasn’t just tech companies buying other tech companies. In somewhere between 40% and 50% of deals where a tech company was the target, the acquirer was from outside the technology sector. Companies have been looking to integrate additional capabilities into their business. Without the pandemic, these may have been things they could have taken the time to develop, but there has been a sense of urgency.”
Berthold Fuerst, global co-head of M&A at Deutsche Bank, echoes this view, suggesting that “technological change and digitalisation is affecting all sectors … In the past, we used to think about technology as a separate industry vertical. Today, I think it has become a horizontal layer that affects every industry,” he says.
Businesses have also been reassessing their structures and which activities will support their long-term success. “As corporates have to rebuild business models and adapt to the new technology frontier, at the same time they are having to reconsider the complexity of their business structure. If you have to re-engineer and digitalise your business in one area, you really have to think about what is core and what is non-core. I expect these continued portfolio reassessments to trigger further deal activity,” says Mr Fuerst.
It’s no longer about size in itself. It’s not about building bigger companies; it’s about building better companies and faster-growing companies
Mr Albersmeier suggests: “It’s no longer about size in itself. It’s not about building bigger companies; it’s about building better companies and faster-growing companies. At no other time have I ever seen so many announcements of demergers as in the second half of 2021. There is a feeling that the typical conglomerate is challenged in this new environment, where speed is of the essence and where a lot of capital is required to back new technologies.”
Notable corporate splits announced in 2021 included General Electric, Toshiba and Johnson & Johnson, which each intend to split their existing businesses into two or three parts.
There was an abeyance in shareholder activism during the early part of the pandemic, as boards were given some breathing room. But this is no longer the case. Mr Albersmeier points out: “Activism has rebounded in a big way last year, and activists are very much of the view that the conglomerate of the past will not be the winning model of the future.”
Mr Shafir agrees, noting: “Conglomerates are reconsidering their set-up because they don’t want to have a broad portfolio that includes underperforming assets and be subjected to an activist threat. Our data suggests that the shares of these larger companies are not trading as well as more pure-play companies.”
Sustainability-linked M&A
Another factor driving deals has been a growing focus on environmental, social and governance (ESG) considerations. Although it is not a large part of the market at present, ESG is expected to become increasingly important. “There are interesting things happening around the food chain, waste management, clean tech and renewables,” says Mr Shafir. “It’s a very interesting time and while it may be a relatively small part of the market now, it’s going to be a big growth engine for transaction volumes over time.”
“ESG will trigger portfolio shifts and refocus, either by getting rid of activities that are less compliant or potentially expanding into areas where transition can provide growth opportunities for companies,” adds Mr Fuerst, although he also points out that “it’s not always easy to label a single [M&A] transaction as a key ESG transaction.”
Capturing data about ESG-linked M&A is complex, not only because assets may not neatly fit into clear sustainability-related classifications, but because the motivations behind deals could be pertinent too. For instance, a deal involving carbon-intensive assets such as a coal mine could potentially be positive or negative, depending on intentions for the asset.
Mr Toole highlights that “it’s hard to measure intent”. He believes this topic will attract a lot of discussion in the coming years. “There’s a lot of conversations going on. Banks want to be able to speak about their commitments and work they are doing on ESG in a meaningful way.”
Clouds on the horizon
While there remain a host of positive factors, bankers are cognisant of clouds on the horizon. “[Gross domestic product] growth will likely be slower this year in most parts of the world according to most forecasts,” Mr Shafir says. “The spectre of inflation is real and then rate increases and central bank tapering following that. There continue to be supply chain issues. There is also still Covid-19 and the threat of further variants out there. Another potential issue is if the equity market gets hit and we see a strong move away from growth stocks into value stocks.”
Although the emergence of Omicron in late 2021 was disruptive, the general trend seems to be that this lessens with each new variant. While it is impossible to say with certainty what the next variant will bring, Covid-19 is largely not expected to significantly weigh on M&A. Mr Lo says: “Omicron is still here, and it is having an impact, but based on experience so far I don’t think it will dampen the M&A environment. We have lived through Covid for two years now and moved through probably the worst of times with it, so I think people have learnt how to adapt.”
Indeed, two years into the pandemic and it is impressive how effectively deals can be done remotely. “One of the interesting dynamics has been the efficiency,” says Mr Adams. “People have been travelling a fraction of the time they were before and processes have been compressed, so the whole way of working has lent itself to that increase in volume.”
While “that won’t apply across the board”, he adds, “there are certain sectors where it is more important to be able to visit physical assets and interact with people in person. But in other areas, such as tech, there is more of a focus on data and commercial diligence and it is possible to do a lot of those kind of checks remotely and efficiently.”
Despite the increased efficiency, several bankers remarked that they do anticipate in-person meetings making a quick comeback, when possible, due to long-term relationship-building and for apprenticeship of junior staff.
Not elephant deals
Another notable trend in 2021 was rather than M&A activity being driven by large deals, mid-size deals accounted for the bulk. Ms Aiyengar observes: “The number of deals in the $1bn to $10bn category was elevated last year. So, the volume was not all being driven by $10bn-plus elephant deals. The number of those deals last year remained relatively stable.”
This, suggests some bankers, means the market is operating on a more sustainable basis. Mr Shafir says: “In total about half the volume was $1bn to $10bn [deals]. So, the market wasn’t overly reliant on mega-transactions. And that’s constructive because those transactions have a higher probability of standing up even in more difficult environments.”
Steve Baronoff, chairman of global M&A at Bank of America, says: “With deals in the $3bn to $10bn space, a lot of those are companies looking to enhance their business model, but they don’t feel it’s necessary to do something transformational. CEOs are generally feeling good about their business; the markets are strong, so they are using M&A to add something or bolster what they have. I think the bulk of the deals will continue to be these ‘enhancing transactions’.”
Regulatory concerns
One significant factor cited by multiple market participants that could create a more challenging environment is the shifting regulatory environment. This is a prominent theme in the US where the appointment of Lina Khan as chairperson of the Federal Trade Commission, and other developments, indicates the Biden administration intends to take a more robust approach to antitrust. But bankers highlight that this is a broader global issue.
Ms Aiyengar says: “This is true the world over, where different jurisdictions are defining how they want to regulate this area, and it is not consistent. It’s an evolving situation and you need to understand the emerging and changing rules. It’s particularly true in relation to large technology companies. We’ve already seen deals not happening, and if this became more of a trend then that could have quite a chilling impact.”
Bankers suggest these circumstances may require additional consideration upfront of regulatory risks. “I think those regulatory considerations will ultimately become factored in, to a certain extent,” says Mr Fuerst. “For firms factoring this in, you need to be more diligent in anticipating what might be required in terms of remedies and the time the regulatory process may take. Because these things will change the deal economics and you have to determine whether it still makes sense or not. But once you find the terms to factor this in, then people can cope with it.”
Mr Baronoff echoes this view: “We spend a lot of time on transactions and making sure we have a high degree of confidence that they’ll be approved by the antitrust authorities, [as well as] working on upfront solutions to antitrust concerns and going through the latest guidelines. There is an enormous amount of pre-planning and pre-structuring done to make sure by the time a deal is announced, it has a very high likelihood of being approved.”
Confidence remains
Overall, while there is some nervousness around potential disruption, broadly market confidence remains high. Bankers across firms report a current pipeline that is stronger than the first quarter of 2021.
“The current pipeline is running above where it was this time last year. The amount of strategic dialogue is very robust,” says Mr Baronoff. “Last year was so active it’s hard to predict it will be better than 2021, but it doesn’t feel like there will be a dramatic fall off.”
