M&A Activity in 2022 (A Recap of Q1 and a Look Forward)

Written by Hanny Akl, Daniel Valle on May 20, 2022

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Global merger and acquisition (M&A) activity hit new highs in 2021, with overall value reaching $5.8 trillion—a new record. While investment bankers and analysts initially expected deal-making to remain strong well into 2022, there are signs that the market may be cooling down.

If you are considering a merger or acquisition, a few recent findings may help shape your overall strategy.

M&A Activity for Q1 2022

According to PitchBook Data’s US PE Breakdown report, during the first quarter of 2022, private equity dealmakers closed 2,166 deals for a combined value of $330.8 billion.

While this represents an increase in both deal value and volume from the same quarter in 2021, several factors pose a challenge for mergers and acquisitions in 2022, including:

Macro-Economic Conditions

Inflation is the economic buzzword in the U.S. right now, with consumer prices up 8.5% for the year ended March 2022—the largest 12-month increase since December 1981. Producer costs, particularly in energy, have increased significantly. According to The World Bank, the rise in oil prices over the past two years has been the largest since the 1973 oil crisis.

To curb inflation, the Fed increased its benchmark federal funds rate by half a percentage point in May 2022 and is gearing up for more rate increases throughout the coming year. When interest rates rise, the cost of financing an acquisition increases, and those increased costs usually discourage buyers.

In addition, most acquirers use a valuation method that uses a discounted cash flow model starting with the Treasury rate. When the Treasury rate is higher, the discount is higher because buyers can safely invest their money in a risk-free alternative and earn higher interest. As a result, buyers may discount target companies to account for the increased risk.

Geopolitical Uncertainty

Russia’s invasion of Ukraine created uncertainty and volatility in the market. Any cross-border transactions touching the region need to be analyzed to determine whether the deal is permissible under current UE/UK/US sanctions.

Obtaining new financing for transactions involving entities or individuals in the conflict region will also be extremely challenging.

Expanded SPAC Regulations

Special purpose acquisition companies (SPACs)—shell corporations designed to take a company public without going through the traditional IPO process—took the public markets by storm in 2021. However, the SEC’s plans to regulate SPACs more strictly and increased scrutiny from federal prosecutors looking to combat insider trading and investor fraud present significant obstacles to the future of SPACs.

While SPACs may remain a vital feature of the M&A landscape for private companies interested in going public via business combinations, the parties involved will need to focus more time and attention on due diligence and disclosures.

Key Themes Will Continue to Drive M&A Activity in 2022

Despite these challenges, we don’t expect to see a slump in M&A activity in 2022. Instead, we expect to see more of a return to normal after the breakneck pace of 2021. Many market conditions continue to drive mergers and acquisitions, making it likely that activity will continue at a lesser rate than the previous year.

Supply Chain Disruptions

Supply chain disruptions that started in the early days of the pandemic continue to be severe and shoring up those supply chains has been an area of particular interest for buyers.

The coming year could see more vertical integration deals as companies work to secure critical raw materials and components, control how products are distributed, reduce lead times and build greater resilience into their supply chains.

Staffing Challenges

Ongoing staffing challenges are stunting growth at many organizations. Recruiting highly skilled labor through traditional routes is challenging, leading companies to engage in “acquihiring”—obtaining skilled labor from other companies via a merger or acquisition.

As the current labor shortage is expected to continue for the foreseeable future, motivation to acquire other businesses will remain.

M&A Actions to Consider in 2022

If you are considering a merger or acquisition in 2022, here are some actions to consider:

Prepare for A Seller’s Market.

Despite the slowdown of M&A activity, it is still a seller’s market—especially for deals with strong performers. Expect high valuations and plenty of competition.

Research Deals Carefully.

Several big companies have recently announced divestitures and demergers to divest underperforming businesses and return focus to their core operations. This creates excellent opportunities for companies interested in acquiring struggling businesses. Consider having a quality of earnings report conducted to avoid potential pitfalls or skeletons in the closet.

Seek Out Expert Advice.

Navigating M&A transactions in the current environment can be complex and high stress. Leverage your trusted advisors’ experience and expertise to help negotiate the best deal for all parties and access financing.

Learn More and Connect with an Advisor

If you have any questions regarding mergers and acquisitions or today’s current transaction climate, Warren Averett’s trusted advisors can help. Contact your Warren Averett advisor today for guidance on navigating the merger and acquisition market, or ask a member of our team to reach out to you.

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