M&A and PE outlook for 2022 and beyond

April 2022  |  FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

April 2022 Issue

The deal market was red-hot in 2021, with global M&A topping $5 trillion for the first time ever, eclipsing the previous record of $4.55 trillion set in 2007, according to Dealogic. Refinitiv’s figures put total M&A value at $5.8 trillion, up 64 percent on 2020. With 62,193 deals in 2021, volume was up 24 percent on the previous year, amid a flurry of record months.

In 2022, activity is expected to remain very strong, particularly in the private company space. Supported by low interest rates and ample credit availability, the current sellers’ market is likely to continue for the foreseeable future.

In terms of sector activity, the technology space dominated. M&A values in the sector exceeded $1 trillion in 2021, the highest year on record, with a 64 percent increase on 2020, according to Allen & Overy. The technology sector accounted for nearly 2 percent of aggregate global transactions by value and more than 22 percent by volume.

Notable deals included DoorDash, the US online grocery delivery business, acquiring Finnish delivery company Wolt for €7bn, Ericsson agreeing to acquire cloud communications company Vonage for $6.2bn, Emerson acquiring AspenTech for around $11bn, Qualcomm purchasing Swedish automotive tech company Veoneer for $4.5bn, and Etsy acquiring vintage and pre-owned clothing app Depop for $1.6bn.

Another key sector was industrials, which saw a 100 percent increase in deal volume in Europe, the Middle East and Africa (EMEA), according to Louise Wallace, a partner and global head of Corporate/M&A at CMS. “Some significant transactions included Aercap’s $31.2bn acquisition of GECAS and CDP Equity, Blackstone and Macquarie’s acquisition of Autostrade per l’Italia,” she adds.

Sizeable deals were announced in other industries, too. AT&T Inc agreed to merge its media business with Discovery Inc in a $43bn transaction, Medline Industries Inc was subject to a $34bn leveraged buyout by a consortium of private equity (PE) firms, and Canadian Pacific Railway agreed a $31bn takeover of Kansas City Southern. In February, Veritas Capital and Evergreen Coast Capital agreed to exit athenahealth Inc, a provider of cloud-based enterprise software solutions, in a $17bn deal with affiliates of Bain Capital and Hellman & Friedman.

According to EY’s ‘The CEO Imperative: Will bold strategies fuel market-leading growth?’ report, technology, healthcare and advanced manufacturing are the top three sectors likely to purchase new businesses going forward, with the US, UK, China, India and Germany as the preferred target locations.

Geographically, the US deal market was particularly buoyant in 2021, recording $2.9 trillion in transactions, according to KPMG – up 55 percent from $1.9 trillion in 2020, when the value of announced US deals fell by 18 percent. The US accounted for nearly 60 percent of all global deals by announced value, up from less than 50 percent in 2020.

Private equity in full swing

The uptick in private equity (PE) activity during 2021 was significant. According to Squire Patton Boggs and Mergermarket, the first three quarters of 2021 saw PE firms involved in 6441 deals worldwide, with a collective value of $1.6 trillion – eclipsing each of the past five full years in both volume and value. PE deployed almost $945bn dollars in US buyouts toward the end of 2021 – two and a half times the same period in 2020 and more than double the previous 2007 peak.

This boom in activity took place within the grip of the global coronavirus (COVID-19) pandemic. “M&A dealmaking was forced to adapt in 2020 at the start of the pandemic, and this change continued into 2021 in light of continued lockdowns,” notes Ms Wallace. “For PE, this meant launching funds without a single in-person meeting, with multi-million-dollar deals closed without the usual handshake.

“However, having adapted to this new normal and energised by the return to normality, buyers and sellers are feeling more confident than ever. In research we completed last year, 51 percent of dealmakers believed that COVID-19 has actually driven market activity, and 53 percent felt that 2022 promises even more,” she adds.

To be sure, the asset class is not short on capital. Since 2017, more than $1 trillion has been allocated to global buyout funds, with a significant portion yet to be deployed, according to McKinsey. As of September 2021, a record $1.32 trillion in dry powder sat in PE coffers, according to Preqin’s ‘Alternatives in 2022’ report.

Mega deals are expected to continue at pace throughout 2022. According to PitchBook, given the growth of PE dealmaking, its impact on global markets and the fact that firms expect to amass more $5bn-plus funds than ever in 2022, mega deals could feature more frequently. The $34bn MedLine and $17bn athenahealth deals are recent examples of buyout activity at the top end. Moreover, KKR’s €10bn-plus offer for Telecom Italia, and the possibility that Bain Capital and CVC could bid on Walgreens’ carve out of UK-based Boots, suggest that mega deals may not be restricted to North America.

The PE industry is also seeing a shift in interest toward environmental, social and corporate governance (ESG) trends. In 2021, up to the end of November, ESG-focused funds raised a record $649bn worldwide, up from $542bn and $285bn in 2020 and 2019, respectively. Among the largest of these funds are KKR’s $1.3bn Global Impact Fund and Apollo Global Management’s Impact Mission Fund, which is targeting up to $1.5bn, illustrating the importance of ESG investing in this space.

“ESG factors are increasingly top of mind for PE firms,” agrees Daniel Borlack, a partner at Stikeman Elliott. “From performing due diligence on acquisition targets to running their portfolio companies to reporting to their investors, PE firms are increasingly focusing on ESG considerations. With PE firms looking to reduce their carbon footprint in traditional funds and more PE firms launching ESG-focused funds, green ‘targets’ will be in demand by both PE firms and traditional energy companies looking to diversify.”

In terms of PE exits, buyout firms took advantage of a robust M&A market and highly active public markets for IPOs, particularly in the technology sector, to realise exits for some of their portfolio companies in 2021, according to Mr Borlack. At the same time, they positioned other portfolio companies for exits in 2022 by returning their operations to normal, to the greatest extent possible. “With those steps, and with more volatile public markets, we are seeing a high volume of M&A sales processes being launched for portfolio companies in early 2022,” he adds.

However, as the world emerges from the depths of the pandemic, PE houses are aware that the market is not all plain sailing. “Antitrust and cross-border merger controls are complicating deals, asset prices are full and inflationary pressures are now impacting interest rates and targets,” says Ms Wallace. “Deal multiples reached record highs in 2021 and this activity is projected to continue, with pressure to meet full valuations and secure assets, where high price reflects high quality in a competitive market.

“PE houses when selling, however, have further opportunities as the buyer pools have enlarged. In addition to other PE buyers, trade buyers are now focusing on M&A, having been released somewhat from the shackles of COVID-19 and the SPAC market, which grew considerably in 2021 and gives a further avenue to exit.”

The SPAC factor

Another major contribution to recent M&A activity has been provided by special purpose acquisition company (SPAC) transactions. SPAC deals enjoyed a meteoric rise in 2021, with more than $160bn raised on US exchanges – nearly double the prior year, according to data from SPAC Research. According to BDO’s Autumn 2021 Private Capital Pulse Survey, 58 percent of fund managers said that over the last 18 months their exit strategies had shifted to include greater consideration of a SPAC, and 10 percent of CFOs surveyed by BDO at PE-backed companies said they were considering a SPAC in 2022.

However, some observers wonder if the SPAC bubble may be about to burst. Under the rules, SPACs have 24 months to find a target company to merge with, otherwise they must return the money to their investors, which would result in them being wound down. As of early February 2022, there were nearly 600 SPACs searching for an acquisition target against this impending deadline. According to Dow Jones Market Data, companies that have gone public via SPAC since February 2021 have since lost 25 percent of their value.

SPACs are also losing some of their lustre amid expected regulatory clampdowns, with a growing number of planned listings being withdrawn. In the US, for example, future US Securities and Exchange Commission (SEC) regulation of SPACs may cover several specific areas of concern, including predictions of financial performance, conflicts of interest among SPAC management teams, insider trading and antitrust violations.

Roadblocks and tailwinds

Though dealmaking has been gathering momentum over the last 18 months, there are, of course, issues which could curtail activity over the coming year and beyond. High valuations, rising inflation and a shrinking pool of attractive targets may combine to supress deals. Other factors include a rise in the cost of capital, potential tax and interest rate increases, enhanced regulatory scrutiny of transactions, potential tax law changes, and, of course, the possible emergence of new COVID-19 variants. Though the world is more than two years into the pandemic, giving acquirers time to adapt and grow comfortable operating in the ‘new normal’ brought on by COVID-19, uncertainty still abounds.

With geopolitical uncertainty on the rise, antitrust and foreign investment authorities are likely to intensify their scrutiny of overseas transactions – particularly with respect to deals in areas deemed sensitive, such as nuclear, communications, data infrastructure, artificial intelligence and computing hardware. In these areas at least, 2022 may still be a challenging year for companies looking to complete deals.

“Buyers and sellers will need to carefully navigate ongoing supply chain constraints and high inflation, as well as expected fiscal and monetary policy responses to these challenges, including interest rate increases and unfolding geopolitical conditions,” suggests Mr Borlack. “However, interest rates are likely to remain low by historic standards, PE firms continue to hold trillions of dollars of dry powder, hundreds of SPACs have billions to spend on acquisitions in the near term, and strong balance sheets remain among strategic acquirers faced with rising costs and supply chain constraints in achieving their strategic priorities organically. Overall, 2022 will likely continue to be a sellers’ market and acquirers should be prepared to act aggressively to take advantage of the right opportunities.”

Yet there are reasons for dealmakers to be optimistic, including the continued rollout of vaccinations and the easing of remaining COVID-19 restrictions, which should see cross-border transactions increase. Improving global economic performance, the sheer weight of dry powder available to PE players and the excess cash sitting on corporate balance sheets should also help tip the scales. Supply and demand for transactions remains healthy, and looks set to stay that way for the foreseeable future.

© Financier Worldwide

BY

Richard Summerfield