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Global M&A to Remain Strong in 2022 as Valuations Reach Record Highs: WTW

Global mergers and acquisitions activity attained historic highs in 2021 with 1047 deals valued more than $100 million, a significant increase from the previous year’s 674 deals, according to research completed by Willis Towers Watson.

The 2021 total (for deals more $100 million) is the highest annual volume since M&A analysis in Willis Towers Watson’s Quarterly Deal Performance Monitor (QDPM) began in 2008.

Deal volume in North America remained consistently strong during 2021, with acquirers closing 614 deals, almost double the 325 deals achieved in the previous 12 months, said the research.

APAC dealmakers recorded their strongest performance for the full year since 2016, despite closing only fractionally more deals regionally compared to 2020 (196 versus 173), as fewer Chinese acquisitions continued to depress volume levels.

European acquirers closed 199 deals in 2021, compared with 155 deals in the prior 12 months, while UK dealmakers closed 48 deals in 2021, up from 36 in 2020.

Based on share-price performance, companies making M&A deals in 2021 outperformed the MSCI World Index (which captures large and mid-cap representation across 23 developed markets countries) by +1.4 percentage points on average.

“The M&A boom in 2021 looks set to continue, fueled by abundant investment capital, strong equity markets and cheap debt, and companies under pressure to make their businesses greener by hunting for targets with the right climate credentials,” commented Jana Mercereau, head of Corporate M&A Consulting, Great Britain at Willis Towers Watson.

Indeed, she said that M&A activity in 2022 is poised to match the peaks of 2015, but deals will be susceptible to increasing challenges such as high valuations, deal complexity, competition for high-quality assets and pandemic-fueled supply chain disruption.

“M&A data coming out of North America also highlights the impact that historically high asset valuations, pushed up by competition and increasing complexity, can have on deal performance. The question is whether prices being paid now will continue to make sense over time,” Mercereau added.

Mercereau cited five M&A trends for the year ahead:

1. ESG goals drive M&A boom

ESG (environmental, social and governance) priorities are climbing to the top of CEO agendas, with greater emphasis to drive employee engagement in a hybrid world of work and purchasing, rationalizing or divesting assets to improve their environmental footprint. Themes such as decarbonization will drive deals and there will also be opportunities for new ventures stemming from climate risk mitigation innovation.

2. Digital transformation accelerates

Businesses have been focusing on the digital transformation of their operations for a number of years, with the pandemic increasing the speed and scale of change.

The so-called Great Resignation, which has forced companies to re-evaluate how to retain and acquire new talent in a scarce labour market, will continue to be a factor with companies under pressure to acquire high-end talent in fields such as cyber security and software engineering. WTW’s M&A data reveals that 293 large and mega deals (those valued at over $1 billion) were completed in 2021, the highest number recorded as companies shaped their post-COVID future through transformative acquisitions. This may well be surpassed in 2022 as companies and investors flush with cash continue to look for acquisitions in areas where they need to grow or add capabilities.

3. Supply chain-driven M&A

Many companies will aim to achieve more self-sufficiency in their products and services due to the immense strain exerted on global supply chains by the pandemic, social unrest, cyber attacks and extreme weather events. They will achieve this through either reshoring, nearshoring or M&A by vertically integrating upstream links to improve certainty of delivery.

4. M&A cycles changing

Instead of declining in line with economic downturns, the unprecedented amount and mix of capital for deals from private equity firms and other investors indicates an increased capability and desire to do deals through downturns. The rising trend to build professional in-house corporate development teams, allowing firms to identify and act on opportunities more nimbly themselves, will further enhance acquirers’ capacity to undertake M&A deals even during high volatility.

5. Strong M&A in 2022, but with caveats

Most dealmakers will be aiming this year to match or exceed their 2021 deal total, but they will also be concerned that inflation pressures and ESG issues could have a negative impact on deal performance.

Besides the ongoing pandemic, supply chain disruptions and talent shortages, government regulation is likely to intensify, with a focus on the technology sector. Companies will also continue to face geopolitical tensions. China looks unlikely to remain the powerhouse of international, cross-border deals, which may serve to stimulate activity in other places such as Japan, India and Southeast Asia. This trend is already evident in WTW’s data, which reveals cross border M&A activity during 2021 has remained at a steady level despite depressed deal activity from China.

Willis Towers Watson’s Quarterly Deal Performance Monitor (QDPM) is run in partnership with the M&A Research Centre at The Bayes Business School (formerly called Cass).

Willis Towers Watson QDPM Methodology

• All analysis is conducted from the perspective of the acquirer.
• Share-price performance within the quarterly study is measured as a percentage change in share price from six months prior to the announcement date to the end of the quarter.
• All deals where the acquirer owned less than 50% of the shares of the target after the acquisition were removed, hence no minority purchases have been considered. All deals where the acquirer held more than 50% of target shares prior to the acquisition have been removed, hence no remaining purchases have been considered.
• Only completed M&A deals with a value of at least $100 million which meet the study criteria are included in this research.
• Deal data sourced from Refinitiv.

Related:

• Global M&A Activity Shatters Records, Topping $5 Trillion in 2021
• M&A Insurance Rates Nearly Double After Explosion of Dealmaking During Pandemic