While the economy was recovering in 2021 from a global pandemic, M&A reached new heights. The pandemic recovery prompted fiscal stimulus and increased liquidity, causing many businesses to turn to acquisitions to regain their stability after problematic lockdowns and supply chain issues.
Global deal value from January until mid-November of 2021 reached $5.1 trillion, gaining 34% over 2020. That was its highest level since 2015. U.S. transactions in particular increased by 2.9 trillion, or 55%, throughout 2021. Of note was the merge of AT&T’s WarnerMedia with Discovery with a deal size of $43 billion.
Beyond total M&A value soaring to new highs, individual deal valuations also continued to rise to new highs in 2021 as well. KPMG notes that more than 80 percent of executives say they expect valuations to rise further in their industries in 2022.
Why the 2021 Boom?
A few factors contributed to the M&A boom of the past year.
First, the pandemic, as we mentioned briefly. With low interest rates and availability of capital, confidence remained high from both credit and equity sources.
Further, low interest rates make financing debt more incentivizing to solid borrowers. These strategic buyers had also already amassed strong profits and cash reserves they could deploy. This means they can expand horizontally and vertically and take on more expensive debt.
There’s additionally been a boom in SPAC (special purpose acquisition company) activity that gives private companies access to public markets. This offers these private companies liquidity that’s extremely incentivizing. Considering SPACs work by bringing companies into public markets via a merger, this increased M&A activity.
Lastly, private equity firms were excited to deploy capital into established and emerging middle-market businesses. Specific industries of interest are healthcare, ESG, and tech.
Talent and Its Impact on the M&A Market
We’d be remiss not to mention talent’s impact on the M&A market. When mergers and acquisitions occur, it creates a challenging environment of change. Not everyone can or wants to adapt, meaning you’ll lose some employees in the process. New leadership needs to integrate various functions and cultures seamlessly, which isn’t always successful.
Once deals are announced, headhunters begin calling these companies figuring out who they can entice into new opportunities. This is particularly problematic when employees feel their new leadership doesn’t communicate with them effectively.
This outcome, coupled with historic quit rates (2.7%) and job openings in 2021, elevates the stress of maintaining employees during mergers and acquisitions. Losing your best talent in this market means it’s going to be very difficult – and costly – to replace.
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Interestingly, there are times where M&As can be purely for the sake of acquiring talent. A former HR leader at Cisco remarked that he often saw scenarios where his company acquired another that wasn’t “high quality.” Instead, it offered Cisco the leading talent that it needed.
Considering hiring talent in verticals such as software engineering can cost $200,000 to $300,000 per year in this market (hiring costs are 1.25 – 1.4 times higher than base salary), if you can acquire a company for not much more than that, it makes fiscal sense.
Keeping New and Old Talent
One key trend in the 2021 M&A market – and the market more generally – is the talent shortage. What can you do to prevent your people from leaving?
Many companies deploy stay bonuses, or payments offered to the “acquired workers,” during a merger or acquisition.” These can be provided in regular installments or given upfront. Stay bonuses, coupled with healthy base pay, is essential for retaining your people.
Further, lots of employees are seeking substantial health benefits in this market. Organizations can seek to acquire other companies with less incentivizing health packages to entice new employees into staying.
All in all, even if some of your talent leaves, that may not be your company’s fault. People are always weighing their careers, and it may have been the right time to pivot for some employees, regardless of a merger.
Looking Ahead: 2022 M&A Market Predictions
Trends from 2021, such as low interest rates, private equity capital deployments, and SPAC activity, are predicted to fuel the boom in M&A activity into 2022.
Important M&A Trends in 2022
Here are a few key predictions for M&A heading into 2022.
There are headwinds forming, some have been with us but have yet to fully play out: projected interest rate increases, regulatory scrutiny of transactions from antitrust and foreign investment authorities, potential new COVID-19 variants, potential tax law changes and various macroeconomic uncertainties. There is also the diminishing tailwind in the form of government stimulus and a tight labor market.
Private Equity Buyers
Private equity (PE) transaction value increased by over 55% in 2021 after a depressed 2020 pandemic year. As it was a large factor last year, PE buying power will be an influencing factor in 2022, as well. There are plenty of raised funds waiting to be put into play for acquisitions.
The pandemic forced businesses to adopt a digital transformation like never before. With this focus on enabling businesses and sales through digital platforms, it’s likely that this need will continue to drive M&A activity across industries.
Environmental, Social, & Governance (ESG) Agendas
As businesses begin to focus on their ESG agenda, they’re far more likely to consider rationalizing, divesting, or purchasing assets to mitigate their impact.
ESG themes featured significantly in many recent activist campaigns. While the role of ESG in M&A has been nascent the tide has begun to change. There is an increasing focus on ESG metrics, materiality and disclosure in M&A transactions that will be a significant trend in 2022 and beyond.
What’s happening with inflation? Although there are varying predictions, most business leaders are looking towards the Federal Reserve and how it will respond, as this is a significant driver in market conditions.
The Fed has signaled that it will be increasing interest rates in the future, and this may encourage acquirers to use debt financing and make deals now to lock in low interest rates.
However, as with the slow rise in interest rates from 2016-2019, a gradual increase in these rates may not have a huge impact in and of itself.
47% of North Americans state that the pandemic sparked an increase in their desire to make deals, with 17% saying it “significantly increased” their considerations. This boom is due to the considerable government stimulation and debt financing.
Understandably, one chief concern for post-COVID M&A activity is the potentially tricky economic environment should current inflation levels prove to be transitory. However, some people believe this inflation is permanent. Which viewpoint emerges as correct will have a substantial impact on M&A activity.
2022 will bring many opportunities and increasing challenges, due to high valuations, deal complexity, and the fierce competition for high-quality assets. KPMG’s global head of M&A notes that “clearly identifying target parameters as part of an M&A strategy will help to filter the tremendous volume of opportunities. Outlining the constraints upon initial evaluation of opportunities, including required diligence, resource availability, and funding sources will position acquirers to chase opportunities within their capabilities, rather than being caught up in the deal frenzy.”
There will be some other challenges, too. 2022 brings with it the uncertainty of COVID-19 and more aggressive U.S. antitrust regulations, both of which could prevent deals from occurring.
Despite these hurdles, M&A is likely to continue seeing vigorous activity in the following year.