Have We Reached Peak M&A?

Are strategic mergers and acquisitions (M&A) back on the corporate agenda? The short answer is, you bet they are. According to figures from management consultants Bain and Company, total global M&A deal value reached $5.9 trillion in 2021, an all time high.

Bain’s commentary called 2021 a ‘historic land grab’, and you can certainly see what they mean. After a pandemic-led dip in activity in 2020, corporates had the cash reserves to pursue expansion, and many did so by acquiring or combining with other businesses. Competitors, suddenly anxious about being left behind, felt compelled to join the fray.

Low interest rates helped, as did the wide availability of target companies only too willing to be acquired. The pandemic gave business leaders time to reflect. Some concluded that the time had come to sell up and do something else; others, that life was too short to put off bold expansion strategies any longer.

As broad as it is deep

Around the world, deal-making activity in the last 18 months has been broad and deep. Companies used M&A to scale quickly, predicting new opportunities in the post-pandemic world. Others acquired businesses that gave them crucial capabilities, often around technology but in other areas as well. Some businesses saw M&A as a quick and easy way to access new markets.

Partner Eric Ribachonek says: “Our group focuses largely on TMT (technology, media, telecommunications) and manufacturing and distribution. We have seen most of our volume on the TMT side. The acquisition of technology has and will continue to play a big part of the deal activity going forward.”

Ribachonek adds that activity in media and telecommunications has also been significant, both as a shortcut to more advanced technology in an increasingly digital sector, and because of the continuation of a trend towards consolidation in this space.

The Bain and Company report confirms what UHY members have been seeing on the ground. It says tech assets have boomed spectacularly, with median enterprise value/EBITDA (earnings before interest, taxes, depreciation, and amortization) multiples at 25 times. Perhaps unsurprisingly, healthcare also saw asset prices soar. “In both tech and health care, buyers are willing to pay a premium for high-margin, high-growth assets,” the authors state.

The U.S. leads the way

Deal values soared around the world in 2021, but nowhere more than in the U.S., where the $2.6 trillion of deal value was 30% higher than the previous record. It was the first time US M&A activity had breached the $2 trillion mark. “My group operates in the financial and tax due diligence and post-deal integration space. The number of deals we supported in 2021 was more than double that in 2020,” says Ribachonek. “We utilize (trend indicator) Pitchbook, and their middle market private equity research also suggests that both deal value and volume have almost doubled since 2020.”

The U.S. has always been fertile ground for M&A, but 2021 was unique in both the size of deals and the complexity of the financial vehicles used to facilitate them. This was the year of the SPAC (special purpose acquisition companies - companies formed solely for the purpose of M&A) as many sought merger targets. SPAC mergers accounted for approximately 20% of US M&A volume. In addition, private equity firms drove the market forward by deploying historic levels of cash reserves in ever more creative ways.

All this, says Ribachonek, was underpinned by a low interest rate environment, and a rebound from the dip of early COVID. “Towards the end of 2021, we also saw lots of activity stemming from a concern that tax rates may change,” he adds.

2022 and beyond

Will this frenzy of activity continue in 2022 and beyond? Until very recently, most commentators were predicting another busy year. Many still are – not perhaps the record breaking figures of 2021, but good nonetheless.

Rob Kindler, global head of M&A at investment bank Morgan Stanley, is not alone in claiming that "all the key elements that made the 2021 M&A market so strong are largely in place".

In the U.S., that is reflected in a strong pipeline of deals for Ribachonek and his team. “The macro environment will play a big part in what happens in the next 12 months,” he says. “The situation with Russia and Ukraine, inflation, rising interest rates, these issues may impact M&A activity. For now, all I can say is we haven’t seen an adverse impact from these factors.”

The twin threat of inflation and rising interest rates had already been identified by many experts, alongside potential supply chain issues and increasing regulatory scrutiny in some sectors. But the Ukraine situation is a headwind that nobody could have predicted. At the time of writing, its effect on wider global M&A activity is starting to be felt.

Figures released for the first quarter of 2022 show M&A activity down by 29% when compared with the same period last year. Stock market volatility, fueled by the conflict in eastern Europe, is blamed for putting the brakes on deal-making. Large companies are pausing their acquisition strategies, at least in the short term.

Elsewhere, despite the downturn, deal-making is still strong by historical standards. “While execution has become a bit harder due to the increased volatility and macro concerns, that hasn’t stopped new activity,” said Stephan Feldgoise, co-head of global M&A at investment bank Goldman Sachs.

So, have we reached peak M&A? The short answer is that we probably have. A convergence of factors helped to make 2021 a record year for M&A deals, and those unique circumstances are unlikely to be repeated. Indeed, the headwinds of 2022 – predicted and otherwise – are already slowing the surge. But decline is relative. At the moment, M&A activity has simply returned to levels that were typical from 2016 to 2019. What happens next may depend on unknowable geopolitical events. For now, M&A remains buoyant, if no longer booming.