Global M&A have hit new highs every passing year. Even post COVID 19 when everyone and everything took a back seat, M&A have picked up the pace and are expected only to grow.
M&A a trend shaping sector
Global mergers and acquisitions (M&A) hit new highs in 2021—breaking prior records by a great margin. Economic optimism remains high, there are strong deals pipeline, capital is available in abundance, and companies across all industries are in dire need of technology and/or technology upgradation. It is true that the headwinds are growing and gaining momentum by the day. Factors like low operating costs, lower regulation and taxes, and ever lower interest rates have, over the past decade, helped companies achieve year-on-year earnings growth, pushed stock markets to record highs, and generally spurred M&A activity. But now, all of these factors are facing severe pressure for the first time in a decade, due to the pandemic. As a result, higher interest rates, rising inflation, increased taxes and greater regulation could place structural or financial hurdles or delays for deals in 2022 and the year to come. There is already greater volatility in the financial markets, further disruptions in the global supply chains and increased levels of fiscal debt, as a consequence of the pandemic.
Valuations are expected to remain high due to intense competition between corporates, private equity (PE) and special purpose acquisition companies (SPACs). PE deals have been on a particularly impressive run, and are on course to grow their share of M&A. On the corporate side, the strategic shift to digital, innovative and new disruptive business models continue to drive M&A decision-making.
The key themes driving global M&A
Virtual M&A
Just two years back a mention of doing “virtual” due diligence to an M&A executive would have earned you a smirk. Yet today at the end of 2021 we are all doing the same. Today’s environment requires a creative approach when it comes to meeting the management team or walking a facility. We have seen the cost efficiencies and speed of virtual M&A—and for those reasons, among others, I don’t think things will go back to the way they were. We will likely have more of a hybrid approach in the future, with a mix of in-person and virtual.
With market conditions demanding a greater value creation mindset across global boardrooms, CEOs will be compelled to focus on divestitures, as they rebalance their portfolios for longer-term growth and profitability.
Divestitures, Demergers and Agility
Several factors are driving a fundamental re-orientation in boardrooms across the globe. Shareholder activism has compelled many corporate boards to strategically review their portfolios and divest non-performing, under-performing or non-core businesses. There is an increasing value being placed by company boards to be nimble-to to react quickly to the changing customer behaviours, disruptions in the existing business models, desire for greater operational or financial agility and a focus on industry specific dynamics. These factors now seem to far outweigh the traditional benefits of scale and conglomeration.
Regulatory Scrutiny Hurdles
Many countries across the globe are tightening their regulatory environment especially in those deals that invite antitrust or Foreign Direct Investment (FDI) scrutiny. They are also implementing stricter anti-monopoly, data security and industry-specific regulations. This rising protectionism could result in more focus on domestic deals and create headwinds for cross-border M&A deals.
Supply Chain Optimization
To build agility and resilience against the prevailing headwinds of disruption in the supply chains, most companies are now focusing on shoring up their supply chains. More vertical-integration deals, both upwards-to secure key raw materials and components as well as-downwards-to control how products are distributed are likely in 2022. Companies facing raw materials, input or labour shortages, port lockdowns, shortages of shipping containers are focusing on nearshoring or onshoring opportunities in order to build greater resilience in to their supply chains and reduce their lead times.
Greater Impact of ESG Factors
M&A decision making and strategy nowadays seems to be greatly influenced by the environmental, social and governance (ESG) factors. This is because most investors have now started using ESG criteria to assess risks and to identify opportunities of value creation. With the commitment towards reducing carbon emissions gaining greater momentum, increased capital is likely to be mobilized for transition to greener sources of energy and developing of new technologies for the future.
M&A has always been a useful tool to help companies grow, reach, and achieve beyond their present-day organic means. The more challenging the environment becomes, the more vital they will be, But it is now inevitable that the above industry trends will greatly influence the M&A activity in 2022 and the next few years to come.
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