Global M&A thrived in 2021 as deal activity rebounded from the COVID-19-induced slowdown in 2020 and blew past previous record levels according to Pitchbook. The unprecedented depth, breadth, and velocity of the deal market led deals across all sectors, sizes, transaction types, and geographies to have healthy showings. The rebound endured through most of the year, despite several new COVID-19 variants popping up. Vaccination rates across the globe—and transitioning from a pandemic to an endemic mindset— offer a more stable outlook, which is bullish for deal flow. With a more normalized economic environment, cross-border deal activity finally re-emerged. Much of it was regional, but as the US lifted travel restrictions, transatlantic deal activity also surged back to life. Healthy returns from public markets undergirded a more favourable M&A environment as well. Major equity indexes, including the FTSE 100 and the S&P 500, powered higher through much of the year. This reflected higher confidence levels and surging fundamentals. Earnings and profits rose, while multiples remained aloft. This helped c-suites and board rooms feel more comfortable taking on risk and pursuing M&A deals. Additionally, the lofty multiples enticed private equity- and venture capital backed companies to publicly list—through IPOs, reverse mergers with a special purpose acquisition company (SPAC), or direct listings—at a rate not seen in over two decades.
A growing number of publicly listed companies counters a nearly two-decade trend and bodes well for future M&A activity.
Public companies are much more acquisitive than private companies, especially when considering the largest deals, and the proportion of deals completed with all stock or a combination of stock and cash has swelled over the past two years.
Although M&A activity appears poised to continue its frenzy, several factors are complicating the outlook. One major concern is the elevated inflation readings posted throughout 2021. US inflation hit a staggering 7.0% in December 2021—the highest figure since 1982—while the Euro area hit 5.0% inflation and the UK 5.4% in the same month. Because of this, central banks in Europe and the US are facing difficult questions about how they will respond in 2022. The Federal Reserve has indicated it will raise rates three times in 2022 and is slowing its bond buying program in preparation. The Bank of England began raising rates in December but is still employing some quantitative easing, while the European Central Bank has stated it wants to avoid raising rates in 2022 but will take action against inflation if necessary. Higher rates lead to increased borrowing and leverage costs, higher discount rates, and higher savings rates—all net negatives for deal activity. Myriad factors—including rising demand, supply chain issues, and shifting labour dynamics—are driving inflation numbers. While the demand and supply chain complications are likely to normalize somewhat, the shift in labour market forces could pose challenges to deal making. Fear of contracting COVID-19 within the workplace and a demand for higher wages have curtailed the workforce in many low-wage sectors. Labour shortages abound, and, for the first time in decades, labour, rather than capital, is a growth inhibitor. Depending on trends around unionization, minimum wages, and more, margins face compression in human capital-intensive sectors such as manufacturing, hospitality, and healthcare services, which may slow M&A activity.
Looking at some of the bigger picture trends, technology and ESG remain recurring themes. Not only does the tech sector continue to account for a soaring proportion of global M&A, but every company is being forced to adopt technologies that increase productivity, engage customers, and/or streamline operations. Companies across industries also face challenges and opportunities related to ESG factors. Oil and gas producers are feeling pressure to treat their workforces better, reduce carbon emissions across product phases, and add underrepresented groups to senior leadership levels, among other things. Automakers are electrifying their fleets and working to more sustainably source resources.