Dealmaking will continue to drive M&A growth and ESG and digitization will permeate sectors
Global M&A activity in 2021 easily surpassed pre-pandemic levels and nearly matched the peaks of 2007 and 2015. With continued easy access to capital and low-interest rates, $5.1 trillion worth of transactions were announced in 2021, up from $3.8 trillion in 2020. Carla Hannemann, head of KPMG Law’s M&A Tax group, says that there are no immediate signs of a slowing deal market based on the volume of new transactions coming to market in the first quarter of 2022.
In an interview about upcoming trends in dealmaking, Hanneman says dry powder, liquidity and inflation are some of the factors that will impact M&A growth in 2022 and ESG and digitization will continue to permeate into many sectors to accelerate value creation.
“KPMG’s 2021 CEO Outlook Survey found that 96 per cent of large-company CEOs in Canada see dealmaking as key to driving growth, up from 86 per cent last year and compared to 87 per cent of their global peers.”
While buyers have tried to resist overpaying as valuations have risen over the last several years, Hannemann says even more capital is available to deploy in North America than in 2021. She expects some institutional investors need to act now to meet time horizons or fiduciary duties. “Dry powder fuels a competitive dynamic and compress terms for deal execution, so people are bidding on shorter timeframes, which means they’re carrying out much shorter, much quicker due diligence, and the result of this are increasing prices, increasing use of reps and warranty insurance.”
Like 2021, she believes one of the most significant factors in the continued rise of M&A activity in 2022 will be the ease of access to capital and low-interest rates. Hannemann says the US federal reserve has signalled that it will soon accelerate its reduction of quantitative easing, and the market anticipates increases in the discount rate. This expectation of a rate increase may prompt investors to make deals that rely on debt financing sooner rather than later.
Some clients have signalled that they see inflation as a headwind that may reduce M&A volume, while others see it as an opportunity to invest now to keep pace with inflation. She says that while many factors drive inflation, the current labour shortage puts pressure on wage increases. A recent report shows that the US Consumer Price Index has increased at a 7 per cent year-on-year rate in December which Hannemann understands is the most significant jump since 1982.
Hannemann says investors who see inflation as a headwind may hold on to capital if they can, with the notion that prices may decrease, enabling them to acquire or invest in a potential target at a lesser multiple in the future. “If liquidity becomes tighter, it’s going to cost more to borrow cash to be able to buy that asset. So, some investors that see tightening liquidity as a headwind may pull back from chasing multiples, waiting for a better time to invest.”
Technology will also be a driving factor in M&A activity in 2022. Hannemann says digitization and technological enablement have become increasingly prevalant in the last five years and will continue to be a priority for clients.
“I had one client say to me, ‘every deal is a technology deal.’ There’s always an aspect of technology now, and I think that’s true in a way that wasn’t a decade ago.”
Environmental Social Governance (ESG) will also influence M&A activity in 2022. Although ESG has been a popular topic for some time now, Hannemann says it seems to be hitting stride, with an increasing number of businesses and funds moving past aspirational ESG goals into action. She has come across headlines indicating that funds are staking their carried interest on meeting ESG key performance indicators (KPIs). Hanneman explains, a carried interest is one of the methods a fund is remunerated for the performance of investments and, very generally speaking, a carried interest increases as the performance of an investment increases.
A KPMG survey of Canadian small- and medium-sized businesses found that two-thirds have tied management compensation to achieving their business plans’ social and environmental targets. Some of her clients have indicated they explicitly price climate and environmental risks into bids and require more disclosure than they ever had before. She says that while ESG has previously been a consideration for this client, it would not have been an explicit pricing component until now. “It’s now being separated out as a distinct factor that is being considered on a dollars and cents basis, rather than an overall transactional basis,” she says. “It’s a big deal. It’s real money, and to tie very real money, very real remuneration to ESG is just amazing."
EDITOR'S NOTE: This article has been updated for more precision on legal trends in M&A.