2022 M&A Is Mind-Boggling. What’s Fueling All the Activity?
Every day, there’s another channel-centric deal. We look at four main trends driving the momentum.
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The Fed has yet to raise rates to the point that debt is unenticing or unaffordable. To that point, KPMG analysts say, “Expectations of rate increases may prompt acquirers that rely on debt financing to move sooner to make deals, rather than later.”
Indeed, the Federal Reserve Chairman told Congress this week he expects a series of rate hikes throughout 2022 to bring inflation (now highest since 1982) under control.
Even so, higher interest rates might not hurt dealmaking, KPMG says.
“When interest rates rose between 2016 and 2019, both deal volume and value rose.”
Private equity firms have a lot of cash lying around right now and they are eager to invest it. As Rusty Wiley, CEO of Datasite put it, “Deal activity in 2022 is expected to continue to be strong, buoyed by favorable interest rates and plenty of dry powder in the way of private equity cash piles.”
PwC experts say private equity firms accounted for 37% of U.S. deal volume through mid-November. That amounted to 28% more than 2019 and 24% more than 2017.
With that in mind, M&A this year will focus on growth, Datasite’s Wiley added — whether organic growth or increases that come of “revenue synergies,” he said.
“Transformational deals will no doubt continue in 2022, especially as companies seek to future-proof their businesses,” Wiley wrote. “Yet many dealmakers are expecting to acquire new businesses, especially products, services or markets, to expand a company’s revenue and profit.”
Expect private equity companies to stay hungry to “deploy capital to emerging and established middle-market companies, particularly in industries that remain red hot, whether in tech, healthcare or ESG-oriented companies,” experts at law firm Hinckley Allen say.
Nearly all pundits agree: Demand for digital transformation capabilities will keep fueling 2022 M&A. In 2020, organizations began their adoption of modern technologies that support remote work more quickly than anticipated, due to the pandemic. (For context, as one cloud vendor told Channel Futures, the customer of 2030 arrived early.)
And then the Great Resignation started. Companies were forced to offer work-from-anywhere options to attract and retain people. A swath of employees figured out during COVID-19 lockdowns that they enjoyed not commuting, and getting more time with their loved ones. Last year they left jobs that do not support remote work and are only interested in employers that do. In 2022, dealmakers will pursue M&A that buoys digital transformation efforts.
“Our M&A data reveal 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-19 future through transformative acquisitions,” wrote Willis Towers Watson advisers. “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.”
Observers at PwC agree.
“Some re-evaluations of business models and deal strategies are being driven by shifting customer demands as a result of the COVID-19 pandemic, while other companies aim to improve resilience amid such threats as cyber attacks and supply chain disruption,” they say. “Transformation increasingly involves reassessing digital capabilities, and the share of technology acquisitions by non-tech buyers is growing.”
Meanwhile, KPMG analysts say the ongoing pandemic remains a big contributor to 2022 M&A.
“We expect the need for digital and business transformation to continue to be an important driver of deals across all sectors,” they say.
Organizations are making environmental, social and governance (ESG) initiatives a top priority. As such, 2022 M&A will not necessarily revolve around those efforts, but it will place them at the forefront.
“Investors are likely to regard ESG goals as a critical element in building a more sustainable business that can better adapt to potential market shifts,” KPMG says.
A PwC survey found that 79% of global investors say ESG risks represent an important factor in investment decision-making.
“While not undertaken solely with M&A in mind, corporate ESG initiatives are getting more scrutiny in deals from both a risk and an opportunity perspective,” PwC says.
CEOs stand at the helm of the ESG 2022 M&A trend, too, according to Willis Towers Watson. These executives are putting more emphasis on driving “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, with additional opportunities for new ventures stemming from climate risk mitigation innovation.”
Nonetheless, Willis Towers Watson advisers predict that snags with ESG issues “could have a negative impact on deal performance.”
Similarly, law firm Cleary Gottlieb emphasizes that “use of ESG buzzwords won’t be enough to convince investors and other stakeholders that the purported ESG merits of a transaction are more than just window-dressing. Acquirers will need to incorporate more robust ESG due diligence into their transaction planning as they confirm the investment thesis and implications for existing ESG commitments.”
Therefore, look for 2022 M&A that materializes around ESG to contain weight and heft.
2022 M&A activity is no fluke. Clearly, driven by several converging factors, organizations are keen to capitalize on opportunities while money is cheap — and before the bad gets any worse. We don’t expect any letup in the momentum. If you spot any channel M&A that we’ve somehow missed, let us know.
2022 M&A activity is no fluke. Clearly, driven by several converging factors, organizations are keen to capitalize on opportunities while money is cheap — and before the bad gets any worse. We don’t expect any letup in the momentum. If you spot any channel M&A that we’ve somehow missed, let us know.
2022 M&A is off to a mind-boggling start. Not even two full weeks into the new year, Channel Futures is reporting on yet more transactions every day — and that’s just within the indirect channel. Whether vendor or partner, companies are eager to combine strengths, augment weaker areas and beef up presence in new regions.
As for the amount of money companies are throwing at each other, that’s a bit of a question mark. Most of the deals are private, so the amounts are not disclosed. Behemoth advisory firm PwC says there’s a “significant increase” in volume among “not-quite-mega” deals, a category that likely houses much of the channel’s M&A. 2021 saw more than 800 transactions totaling between $500 million and $5 billion in value, PwC says in its Deals 2022 Outlook. That number compares against a typical year featuring 400-500 such deals, the firm notes. The stats indicate that 2022 M&A could rise even higher. Given the transactions already wrapped thus far, activity that outpaces 2021 looks more than possible.
“[M]any companies are navigating the competition for assets in different ways, including through smaller and midsize transactions that could still deliver solid proceeds and ultimately be scaled for larger deals,” PwC says.
Of course, there are no guarantees. Certain headwinds could start blowing harder and snuff out the flames of any nascent M&A arrangements. One of the most prominent potential headwinds? Inflation. In fact, 71% of respondents told M&A industry SaaS provider Datasite that inflation impacted an M&A deal they worked on in 2021. They expect that obstacle to carry over in 2022 (no surprise, given the 7% rate at which inflation already has risen). Law firm Hinckley Allen concurs with this observation.
“Rising inflation is a macro-economic concern for all business owners and operators,” legal experts write in the company’s 2022 M&A Market Forecast.
Still, 48% of the dealmakers polled by Datasite said they expect M&A to increase this year.
Another headwind that could put a stop to any 2022 M&A comes in the form of ongoing supply chain problems. Indeed, 14% of Datasite’s respondents cited this as a key obstacle. GDP growth, unemployment, tax rates and a more aggressive antitrust environment in the United States also could impede progress.
Underlying all of this is, no shocker, COVID-19.
“The impact of [COVID-19] and its many variants remain a real concern,” Hinckley Allen’s experts say. “For companies that struggled during [COVID-19], the fear of pandemic disruption is worrisome.”
Yet in spite of these potential deterrents, observers remain upbeat about 2022 M&A. Last year’s boom “looks set to continue,” said Duncan Smithson, M&A expert at advisory firm Willis Towers Watson. “M&A activity in 2022 looks poised to match the peaks of 2015,” Smithson added.
With all of that as context, Channel Futures wanted to explore the trends that are making 2022 M&A so attractive. We did so in the slideshow above. Keep these patterns and issues in mind as more companies announce more deals. Because they will.
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