Driving forward: Transactions Outlook 2022

With record-breaking figures for mergers and acquisitions (M&A), 2021 will go down as the year when the sector truly bounced back from the upheaval wrought by the Covid pandemic.

An insatiable appetite from both buyers and sellers pent-up demand from the previous year saw some truly astonishing numbers. That demand shows no signs of stopping in 2022, but there are potential issues ahead, including rising inflation, tougher regulations and supply-chain pressures which could slow momentum.

But regardless of any possible bumps in the road, confidence among business leaders remains high about what the future holds. Our annual survey of business leaders found that 73% of leaders feel more confident in their ability to innovate compared to before the pandemic.

Their overall confidence in future business growth prospects is also higher at 84%, compared to 76% in 2021.

A record-breaking year

The M&A market flourished in 2021, fuelled by interest in industries that have traditionally been appealing such as technology and healthcare, but with the release of pent-up demand from 2020 - where M&A activity had hit a three-year low - adding gasoline to the fire. Capital was also available in abundance and interest rates were cheap. We also experienced more motivated sellers making lifestyle decisions to exit their businesses.

All of this created a somewhat perfect, positive, storm for the M&A market which was illustrated with some extraordinary figures. Last year, global M&A activity surpassed US$5 trillion for the first time ever, rising 63% to US$5.63 trillion, eclipsing the previous record of US$4.42 trillion set before the financial crisis back in 2007.

Technology and operational innovation were the driving forces as many firms tried to rapidly transform in the face of a quickly shifting world of work, with 260 announced targeted technology deals worth US$1 billion or more each.

The three main markets driving growth in terms of volume of deals were the Middle East, EMEA and Europe, but the Americas accounted for more than half of deal values.

Cautious optimism

With world economies continuing to emerge from lockdowns and reopening their borders, the inertia fuelled by a stellar 2021 shows no signs of slowing down as things gradually return to some semblance of normality.

The global amount of private equity (PE) dry powder at the end of 2021 came in at US$2.3tn, which was 14% higher than the beginning of the year, which itself bodes well for continued M&A spending in the rest of 2022.

But that optimism is not without a caveat. The restrained demand for M&A created by the pandemic has also had other economic impacts. These could continue to provide a source of uncertainty in global markets going forward.

Pent up demand for energy has been unleashed seemingly all at once, leading to a rise in global energy prices. Inflation is also rising in some markets such as the UK, with interest rates following suit.

In many ways, the pandemic created an unprecedented economic situation where many previously unthinkable factors were brought into play, from government stimulus programmes to a voracious appetite – and need – for technology to enable things like remote working.

A return to some kind of normality could, therefore, prove a type of double-edged sword for M&A as public stimulus programmes are scaled back in favour of more conservative approaches to spending and the need for rapid technological transformation becomes less urgent for some companies.

Geopolitical challenges will also continue to impact markets. Concern over Russia’s actions on its borders, China in South East Asia and a US President looking to shed the protectionist instincts of his predecessor all pose questions.

But even in the face of such instability, specific industries including fintech, healthtech, proptechs, agritechs, and other technology-related businesses are less likely to be impacted and deals will continue to happen.

Special purpose acquisition companies (SPAC) are also a driving opportunity, but given the challenge of growth are likely to be less attractive than others.

The regulatory environment will also become more challenging in many countries which could pose issues down the line. The Department of Justice in the US has made several rulings to block deals based on antitrust concerns, while similar investigations are underway in Europe against US technology companies. The Chinese government is also bringing in anti-monopoly regulations.

In the UK, The National Security and Investment (NSI) Act came into force on January 4, giving the British Government standalone powers to review cross-border transactions.

The impact of Brexit in the UK will also continue to cause issues for the movement of goods to EU countries.

This overall caution is also born out in our research. Even with the initial shocks of Covid having dissipated to a degree, there are other worries for business leaders. Economic uncertainty (65%), inflation (61%), cybersecurity issues (57%), and regulatory change (58%) were among their biggest concerns. This left only 54 % believing that global growth was likely to increase, with cost reduction and increasing operational efficiency still the two priority areas for 2022.

Best bets

In the coming year, venture capital (VC) and private equity (PE) firms are likely to be the strongest buyers given the amount of funds they can deploy.

The active sectors in 2021 such as IT, manufacturing, technology will remain active and there remains a great deal of dry powder in the market leading to PE, but also strategic buyers as active buyers in the market.

Health and wellness are likely to continue to prompt interest and deal volume as well as medtech and other areas which feed into them.

Clean energy projects such as hydro, wind and solar will play a strong role in the M&A space alongside biotechnology-related players.

We could also see the verticalization of some specific industries. For example, the retail sector is moving from physical stores to e-commerce, plugging payment systems, and developing its own logistic system.

Distance learning tech will also continue to develop at pace, with the movement to distance learning during the pandemic having led to greater technical refinement and a burgeoning edtech start-up scene, with established institutions such as colleges and high schools continuing to invest.

Consumer packaged goods (CPG) deals are also likely to remain strong.

Sector analysis

While individual sectors will have varying levels of potential going forward, all are underpinned by environmental, social and governance (ESG) and the growing trend towards being seen to be greener.

In research conducted by Mergermarket earlier this year, 65% of dealmakers said ESG was now an important consideration when they were thinking about potential deals, and 60%  said they had walked away from at least one transaction because of ESG issues.

With this in mind, buyers are asking tougher questions about ESG compliance before following through on deals, so how these commitments will be communicated to customers and employees will be a focus of these industries in the coming year and beyond.

Unsurprisingly, technology remains the undoubted growth driver, along with all of the sectors it intersects. With well-publicised shortages in the labour market, we may see M&A activity driven by a demand to acquire skilled workforces, particularly in the technology sector.

Lessons learned on the importance of supply chains during Covid are also continuing to shape industries and how they invest accordingly, with greater demand for data-driven logistical solutions and the companies which can provide them.

Retail and consumer goods are likely to see greater consolidation but uncertainty remains in how the sector will recover following global lockdowns. Many long-established retail chains have gone bust or moved their operations wholly online, which could present opportunities in the retail tech sphere.

New technology may play a greater role in the manufacturing sector by consolidating efficiency too.

With Covid likely to remain a significant issue for many countries for the foreseeable future, healthcare will remain a key sector, with private healthcare especially expected to benefit.

With real estate and construction there remains pent up demand for housing, leaving potential for M&A activity. The sector will also be influenced by interest rates and Government support programmes, such as the UK’s levelling up agenda, will drive investment.

Some direct-to-consumer (DTC) and CPG companies may not see continued growth - a sector that may level off in value and volume. Those sectors which are still hampered by significant supply chain issues may be less attractive. Those businesses that innovate and pivot their operating effectiveness will see continued growth and opportunities.

And with borders restrictions being eased and Covid vaccination programmes now well underway across much of the world, travel and hospitality should slowly continue to bounce back

Roll with the momentum

Following a record-breaking 2021, the coming year looks likely to retain much of the inertia despite some uncertainty around supply chains, energy costs and interest rates.

There are many positive indicators that M&A will remain in a strong position. To discuss any of the topics raised in this article or learn more about the local or sector-specific trends, contact our Transaction Advisory team.