Merlin Piscitelli, Chief Revenue Officer, EMEA, Datasite
Despite some difficult market challenges and the ongoing global pandemic, 2021 became one of the most impactful years for M&A dealmakers to date. The value and volume of deals over the course of the year set new records, reaching $5.63 trillion in December 2021.
This is 40% higher than the value recorded for the whole of 2020 and breaks the previous value high set back in 2007, prior to the financial crisis. In fact, new global diligence projects on Datasite, which are deals at their inception rather than announced, are up year-over-year by over 30% as of the end of 2021.
Pressure to continue delivering this level of success in 2022 is mounting, and dealmakers are eagerly looking ahead, analysing what the biggest M&As biggest dealmakers and dealbreakers could be for this year.
To answer this question, Datasite surveyed 600 dealmakers in the UK, EU, and US on the outlook for M&A in the next 12 months and whether 2022 is likely to bring more record-breaking activity. The results show that while there are some obstacles, dealmaking is likely to continue to soar in 2022.
Nearly three in four dealmakers surveyed said they expect that global deal volume in 2022 will increase. Additionally, when asked about the types of opportunities for M&A activities in 2022, larger acquisitions (22%) stood out as the leading choice, followed by joint ventures and partnerships (19%) and debt-related investments (16%). When asked about the specific transaction types likely to increase next year, 31% said restructurings, 27% with refinancings and debt financings, and 27% said joint ventures and partnerships.
However, despite the positive outlook, it won’t be smooth sailing for all deals. Dealmakers expect to encounter several obstacles, including inflation and regulation.
Inflation – a dealbreaker for M&A deals in 2022?
With interest rates in the US and UK expected to increase over the course of 2022 to tame growing post-pandemic inflation, dealmakers concerns are growing. Inflation is currently hovering at around 5% in both countries and well above central monetary authority targets. In fact, the Bank of England recently raised its interest rate to 0.25% in December. The Federal Reserve’s Open Market Committee is also expected to make at least seven interest rate increases by the end of 2022, causing more concern.
In the UK in particular, inflation was cited as one of the core reasons as to why some deals were derailed in 2021, based on responses from close to two thirds (64%) of 200 UK dealmakers. Almost one in four (24%) said inflation changed valuations in 2021, while 22% said it changed company operating assumptions and 17% said inflation fears caused a deal to fall apart. Still, higher than normal valuations may continue in 2022. There’s certainly been an increase in the number of high-value companies in the UK, with 29 unicorns created in 2021, signifying a 25% increase year-over-year.
The impact of the National Security and Investment Act on M&A
There are also regulatory issues to keep in mind. The National Security and Investment (NSI) Act came into effect on Jan. 4, 2022, and requires businesses seeking to acquire certain UK companies to notify the Department for Business, Energy, and Industrial Strategy about their intentions to do so, should it fall within one of the 17 mandatory areas of the economy. Mandatory notifications and clearance will be required for deals where there is an acquisition of more than a 25% shareholding or voting rights, or a change in the quality of control. It also gives the UK government powers to scrutinise deals on national security grounds, even after deals have been completed.
This is a major development in the UK’s system for screening investments for risks to national security, and forms part of a trend towards stricter control of foreign direct investment seen elsewhere in the world. The regime change also reflects wider concerns over technological sovereignty and strategic acquisitions of undervalued businesses – which have only been aggravated by the COVID pandemic. This means companies and dealmakers will now need to consider several more factors in the dealmaking process, including timelines, procedures, screening criteria and timing of the transaction.
Future-proofing the M&A sector with technology
With all the activity in M&A, the pressure to complete transactions, even immensely complex ones, remains high. This has put pressure on M&A resources, most notably dealmaker bandwidth. Almost 2 in 10 (18%) dealmakers said they were forced to turn away deals in 2021.
When it comes to selling a business or asset, one of the most challenging parts of the M&A process is organising and preparing the files needed for review by potential investors or purchasers. Investment banking analysts often spend weeks reviewing thousands of files to figure out how to organise them and prepare them for a transaction.
To overcome this obstacle, dealmakers around the globe said they are looking to technology to enhance their efficiency and operational effectiveness. In fact, 31% of dealmakers said they relied more heavily on technology to counterbalance some of the bandwidth challenges. By using statistical methods that allow a system to learn from data, and then make decisions, artificial intelligence (AI) and machine learning can leverage an algorithm to sift through those large volumes of data and content in a matter of minutes, not weeks, freeing up dealmakers to focus on higher value activities. We expect this trend to continue in 2022.
A positive forecast
While the current economic environment does pose some challenges for dealmakers – from rising inflation and tighter regulatory measures to supply chain constraints, labour shortages and ESG risks – they’re unlikely to dampen It is unlikely to dampen the number of deals set to take place this year as all indicators show that 2022 is on track to be another banner year for M&A.