Merger, acquisition and divestiture activity recovered strongly in 2021 from the Covid-19 related slump of Q2 2020. Companies that did well through the lockdown and the subsequent ongoing recovery have built up historically high cash reserves. Private equity firms are looking to invest record levels of uncommitted funds. At the same time, debt financing is as cheap as ever, thanks to continuing low interest rates. A surging stock market not only makes equity financing appealing but also boosts boardroom confidence and optimism. As a result, M&A activity is predicted to be on track to hit record levels in 2022, although there are challenges for the unwary. Against this backdrop, here are five things CFOs should know about M&A in 2022.
ESG goals will drive an M&A boom
As noted by BlackRock CEO Larry Fink in his latest annual letter, a focus on environmental, social and governance (ESG) priorities “is not woke—it’s capitalism.” ESG issues are climbing to the top of CEO agendas, with greater emphasis on driving employee engagement in a hybrid world of work and on purchasing, rationalizing or divesting assets to improve the environmental footprint of corporate portfolios. Given the frequency and severity of extreme weather events in 2021 and continuing into 2022, we may have reached an inflection point in terms of public awareness (and customer, supplier and stakeholder consciousness) of climate change as an urgent and important problem to be addressed. Themes such as decarbonization will drive deals, with additional opportunities for new ventures stemming from climate risk mitigation innovation.
Digital transformation accelerates
Businesses have been focusing on the digital transformation of their operations for several years, with the pandemic increasing the speed and scale of change.
The so-called Great Resignation, which has forced companies to re-evaluate how to retain and acquire new talent in a scarce labor market, will continue to be a factor with companies under pressure to acquire high-end talent in fields such as cyber security and software engineering. A study by consulting firm WTW, in conjunction with the Bayes Business School, shows that 293 large and mega deals (those valued at over $1 billion) were completed in 2021, the highest number recorded as companies shaped their post-Covid-19 future through transformative acquisitions. This may well be surpassed in 2022 as companies and investors flush with cash continue to look for acquisitions in areas where they need to grow or add capabilities.
Supply chain drives M&A
The past year has brought home the fragility of global supply chains, with disruptions to global trade and shortages of key components, goods and commodities common. Many companies will aim to achieve more self-sufficiency in their products and services due to the immense strain exerted on global supply chains by the pandemic, social unrest, cyberattacks and extreme weather events. They will achieve this through either reshoring, nearshoring or M&A by vertically integrating upstream links to improve certainty of delivery. Competition for investment assets that can bring resiliency to global supply chains is expected to intensify.
M&A cycles are changing
Instead of declining in line with economic downturns, the unprecedented amount and mix of capital for deals from private equity firms and other investors indicates an increased capability and desire to do deals through downturns. The rising trend to build professional in-house corporate development teams, allowing firms to identify and act on opportunities more nimbly themselves, will further enhance acquirers’ capacity to undertake M&A deals even during high volatility.
M&A activity is strong—but with caveats
Most deal makers will be aiming this year to match or exceed their 2021 deal total, but they will also be concerned that inflation pressures and ESG issues could have a negative impact on deal performance.
Besides the ongoing pandemic, supply chain disruptions, talent shortages and government regulation is likely to intensify, with a focus on the technology sector. Companies will also continue to face geopolitical tensions. China looks unlikely to remain the powerhouse of international, cross-border deals, which may serve to stimulate activity in other places such as Japan, India and Southeast Asia. Deal activity is also expected to continue apace in the U.S. and Canada and in Europe (led by the UK), with strong growth in Central and South America. This trend is already evident in deal data, which reveal cross border M&A activity during 2021 has remained at a steady level despite depressed deal activity from China.
Many companies are looking to take advantage of emerging M&A opportunities. In a highly competitive market, the most successful companies will be those willing to commit resources to build or buy the professional M&A skills and experience necessary to support all phases of the deal lifecycle, from target identification through due diligence to integration planning and execution.