Companies are preparing for another record-breaking year of deal-making.
Mergers and acquisitions reached an all-time high in 2021, fueled by low interest rates, an increase in private-equity fundraising, and companies’ efforts to respond to broader shifts in their industries. According to Refinitiv, a data provider, the total value of global M&A transactions through December 21 was $5.7 trillion, up 64% from the same period the previous year. Meanwhile, the total number of transactions increased by 22% during that time period, to 59,748, according to Refinitiv.
Many of the factors that drove dealmaking in 2021 are expected to persist into next year, according to M&A lawyers and advisers. However, policy changes on the horizon, such as interest-rate increases from the Federal Reserve, which could increase companies’ financing costs, as well as increased scrutiny from antitrust regulators, could slow the pace of corporate tie-ups. It remains to be seen whether new Covid-19 variants, such as Omicron, have an impact on corporate deal making, according to advisers.
“We look at the big trends that have persisted over time and ask, ‘Are they more likely to persist or not?'” And our conclusion is that, in general, they are likely to continue into next year.” said David Harding, an advisory partner at professional services firm Bain & Co.
Throughout the year, companies used cash reserves amassed early in the pandemic to pursue M&A. According to S&P Global Market Intelligence, cash and equivalents at S&P 500 companies increased 11 percent during the third quarter, to approximately $3.78 trillion, compared to the prior-year period.
AT&T Inc. and Discovery Inc. decided to merge their media assets into a new publicly traded company, which was a blockbuster transaction. AT&T will receive $43 billion as part of the deal, and AT&T shareholders will own 71 percent of the new company once the transaction is completed.
Other notable transactions included Square Inc.’s $29 billion acquisition of buy-now-pay-later company Afterpay Ltd. this summer, and Oracle Corp.’s agreement this week to acquire medical records company Cerner Corp. for $28.3 billion. Square renamed itself Block Inc. earlier this month.
When deciding whether to commit to a transaction, finance executives at acquiring companies have had to contend with high valuations. “What’s different about now versus previous booms is…less there’s price sensitivity,” said Michael Diz, co-chair of the mergers and acquisitions group at law firm Debevoise & Plimpton LLP.
According to Bain, transaction multiples—calculated as the ratio of median enterprise value to earnings before interest, taxes, depreciation, and amortization—increased across industries in 2021 compared to the previous year. With 28 times and 24 times, respectively, the technology and healthcare sectors commanded the highest multiples.
ChargePoint Holdings Inc., a Campbell, Calif.-based manufacturer of electric vehicle charging stations, completed two acquisitions this year to expand its European operations. It paid approximately €250 million in cash and stock for Has-to-be, a software firm, and approximately €75 million for ViriCiti, a fleet-electrification company.
According to Chief Financial Officer Rex Jackson, the company approached the two transactions with the intention of being picky. “It’s going to be expensive because the space is highly valued, so let’s make sure we get what we want,” Mr. Jackson said, speaking about the company’s target selection.
During the pandemic, many companies revisited their portfolios and entered 2021 with a plan to sell business lines or buy companies in order to expand. Some companies, for example, bought technology firms to improve their digital capabilities, while others bought competitors to increase sales.
Signet Jewelers Ltd. paid $490 million in cash in November for the acquisition of Diamonds Direct USA Inc., a bridal jewelry retailer based in Charlotte, N.C. According to Joan Hilson, the company’s finance chief, the deal is intended to help Signet increase sales of what it calls “accessible luxury.” “The market is doing quite well in that tier,” Ms. Hilson said, “and we believe we have room to take more share there.”
According to Bain’s analysis of data from Dealogic, a financial information company, mergers with special-purpose acquisition companies accounted for 11% of global transaction values through December 8, up from 6% in full-year 2020.
Because SPACs, which are essentially publicly traded pools of cash, typically have a two-year window to make an acquisition, the surge in investor interest this year is expected to spur additional deal making in 2022. According to Brian Salsberg, global head of the integration practice at professional services firm Ernst & Young, SPACs can act as a broader stimulus for deal making by prompting firms that may not have been ready to sell to consider transactions.
According to Bain, private equity and venture capital firms increased their share of total M&A transaction values in 2021 by about two percentage points from 2020, to 19% and 8%, respectively.
Looking ahead to 2022, a number of economic factors, including rising U.S. GDP, strong corporate earnings, and large corporate cash balances, suggest that deal making will remain robust, according to Colin Wittmer, U.S. deals leader at accounting and consulting firm PricewaterhouseCoopers.
Nonetheless, according to deal advisers, US regulators are scrutinizing large transactions more closely, particularly in the technology sector. The Federal Trade Commission filed a lawsuit earlier this month seeking to halt Nvidia Corp.’s proposed acquisition of Arm Holdings, a semiconductor firm. Lina Khan, Chairwoman of the Federal Trade Commission, has stated that she intends to challenge more corporate mergers and allegedly monopolistic practices.
Despite this, companies are looking for ways to put the money they raised during the pandemic to good use, according to advisers. Sales of investment-grade bonds in the United States fell slightly in 2021 from their peak in 2020, when companies accumulated liquidity to weather the economic shock caused by the pandemic. Businesses sold such bonds for $1.4 trillion through December 21, a 22% decrease from the previous year, according to Refinitiv.
According to advisers, the continued surge in private-equity funding will be a factor in M&A in 2022, particularly in the technology and healthcare sectors. According to Refinitiv, private equity and venture capital firms raised approximately $1 trillion globally through December 21, up 35% from the end of 2020.
It is too early to predict whether next year will break the M&A records set in 2021, but corporate advisers believe there are few factors that will significantly slow it down.