The M&A market hit a record in 2021 and is likely to remain on this level

​published on 6 April 2022 | reading time approx. 5 minutes

The global M&A market hit a record in 2021 and is likely to remain on this level. COVID-19 emerged as a catalysator for business transformations. Previously unpopular sectors became attractive targets following changing consumer demand. Additional tailwind comes from ESG and SPACs. Notably, recent supply chain disruptions did not hamper M&A activity. Pragmatic and concise transaction advisory at deal speed, with a focus on value drivers, is needed more than ever for successful deal execution.

M&A market in 2021

Global M&A activity in 2021 hit a record in terms of both, deal volume and value. While at the beginning of 2020, COVID-19 threatened a collapse of the global economy, people and corporations adapted quickly to the new normal and economies recovered swiftly supported by enormous governmental stimulus packages. Likewise, after a temporary pause in H1 2020, global M&A activity revived during H2 2020 and the tailwind continued in 2021. Notably, the average deal value accelerated in 2021 driven by investor confidence based on solid economic growth, easy access to capital and dry powder at private equity houses. As a result, valuations based on EBITDA transaction multiples peaked in 2021.

After an initial shock, COVID-19 emerged as a catalysator for business transformations, i.e., large corporates started reviewing their business models and initiated the sale of non-core assets, while at the same time pushing the digital transformation and the need for new capabilities which caused a surge in cross-sector deals. Examples include the acquisition of Activision Blizzard, a video gaming company, by Microsoft for USD 69bn.

Previously unpopular sectors became attractive targets, especially for private equity houses, following changing consumer demand and arising growth opportunities. CVC’s majority stake acquisition of Medivet, a UK based veterinary group, for more than USD 1bn, is only one of many examples. Numerous private equity houses have further stretched their usual holding periods partly due to COVID-19 and hence are now in the need to re-shuffle their portfolios. Timing for that is not bad as valuations are at a peak. As a result, private equity involvement increased, especially over the last two years accounting for every second transaction in 2021.

The emergence of environmental, social and governance (ESG) is gaining prominence not only in the due diligence process, but also stimulating M&A activity itself in either direction, i.e., sale of non-ESG compliant assets and acquisition of so-called green assets to improve the ESG balance. Examples include the strategy of the Norwegian sovereign wealth fund to divest non-compliant ESG firms.

Special purpose acquisition companies (SPACs), are usually newly created listed shell companies to finance deals, emerged in 2021, especially in the US. A SPAC deal, where the SPAC acquires a target, is an alternative form to a traditional IPO which usually requires lengthy preparatory, regulatory and legal work. In 2021, there were more than 600 SPAC deals in the US, most notably the reverse-merger of Grab, a transportation, food delivery and digital payment company, valued at almost USD 40bn.

Recent supply chain disruptions which will persist to a varying degree across sectors for the foreseeable future, did not hamper M&A activity. Instead, localizations, i.e., set-up of regional instead of global supply chains may further stimulate M&A activity going forward.

The German M&A market essentially mirrors the global trend of deal volume and value. Notably, deal value increased at a much higher rate in Germany compared to global levels which is multifold but presumably due to economic and political stability as well as a strong R&D footprint. The two largest announced German transactions in 2021 were the takeover of Deutsche Wohnen by Vonovia forming the largest real estate company in Germany for a transaction value of USD 19bn and the acquisition of the German based automotive lightning and electronic specialist Hella by French based Faurecia for a consideration of USD 8bn. A similar trend is also observable in the German mid-cap market, globally known for its hidden champions, which particularly attracted private equity players.

M&A outlook for 2022

It is widely anticipated that the M&A market will remain hot in 2022 with currently no major cooling off tendencies. Remarkable amounts of capital, relatively low interest rates and digital catch-up strategies are the foundation of the underlying optimism. At the back of these robust economic fundamentals, the M&A market is likely to remain active and even grow further in 2022. On the contrary, M&A practitioners are closely observing the rising global geopolitical tensions, the pandemic situation, a potential resurgence of a more pathogenic, vigorous virus, global supply chains and monetary markets with potential adjustments of prime rates. While this list is far from being exhaustive, each mentioned aspect may jeopardise the booming economy and M&A market.

Impact on transaction advisors

Over the past two years and due to stringent COVID-19 measures, such as home office, lockdowns or travel bans, a paradigm change evolved at a breathtaking speed in transaction advisory:

• Digitalisation: While in pre-pandemic times, physical presence was elementary for deal execution and completion, the virtual revolution has become common practice for all stakeholders. Needless to say that project set-up and execution became more efficient, however experienced transaction teams are needed more than ever to bridge virtual barriers and challenges. The importance of trust between advisor, client and target companies, reached another level which is only achieved through superior transaction expertise and project management from Day 1.
• War of talent: The COVID-19 pandemic and its aftermath has illustrated in a rather dramatic way the importance of key personnel in transaction advisory - slightly pathetic also descripted as the “war of talents”. Experienced finance experts and talents were and still are in high demand but short in numbers, especially in this record M&A market. In advance planning of market participants will be key to secure the best transaction teams.
• Due diligence approach: The unprecedented surge of M&A activity and rising valuations required a kind of rethinking in traditional transaction advisory. While due diligence historically took a rather risk-based approach, higher valuations and very competitive auction processes require a more value-based approach to justify higher valuations for investment committees and financing purposes. Stripping out the COVID-19 effect from adjusted EBITDA, net working capital and net debt is often a very time-consuming exercise which should be approached holistically. Needless to say, pragmatic and concise reporting at deal speed to provide clients with a competitive edge is now key.