Expect another strong year for deal-making, say Morgan Stanley’s M&A bankers, as all the elements that drove 2021’s record activity remain in place.
2021 marked a record year for M&A with more than $5 trillion in global volume1—eclipsing prior records and a remarkable rebound from 2020, despite lingering uncertainty from COVID-19. With robust economic growth underpinning elevated CEO confidence,2 corporates pursued transformative M&A to accelerate expansion. Sitting on a record $2.9 trillion of available capital,3 private equity sponsors transacted at an unprecedented pace. High equity valuations (particularly in the U.S.) and low interest rates contributed to the record M&A environment, both of which persisted throughout 2021.
Global Announced M&A Volume
Looking ahead, the environment remains very good for M&A in 2022, according to Rob Kindler, Global Head of M&A. “While it may not be another record year, all the key elements that made the 2021 M&A market so strong are largely in place,” Kindler says.
Brian Healy and Tom Miles, Co-Heads of Americas M&A, acknowledge that some headwinds could come into play and have a moderating impact on transaction activity—rising interest rates, corporates’ near-term inward focus on supply chain and labor challenges, as well as increasing regulatory scrutiny of transactions in certain sectors. “But at the end of the day, economic fundamentals remain robust and there’s an enormous amount of strategic dialogue and transaction demand in the system,” Healy says. “Until that changes, the M&A market will continue to be elevated vs. history.”
Corporates exhibited an expanding appetite for transformative M&A in 2021. Corporate activity was broad across sectors, with companies using M&A to add scale, capabilities and access new markets.
One observable phenomenon reflecting the strong M&A environment is the unusually elevated level of topping bid activity and contested transactions. In an environment where large and attractive businesses are scarce within a given sector, corporate acquirers have been aggressive in using M&A to implement their strategies. Among a number of high-profile contested transactions, one that Morgan Stanley advised on was Kansas City Southern’s $31 billion sale to Canadian Pacific, with a topping bid from Canadian National.
Heading into 2022, corporates will need to focus on resolving the challenges of supply-chain disruptions, labor shortages, a COVID-19 spike brought on by the Omicron variant and cost inflation. Looking beyond these challenges, however, the outlook for global economic growth for the next two years is robust. Confident in the longer-term business fundamentals, corporates will continue using M&A to accelerate the execution of their strategic priorities.
One such strategic priority highlighted by COVID-19 is the increased omnipresence of technology, in e-commerce and logistics, content delivery and consumer interface, business infrastructure and other areas. “Corporates across all sectors—and especially in the industrial and consumer industries—will accelerate their digital transformations through M&A in order to enable faster growth,” Miles says.
Deal-making may prove less robust in sectors still recovering from the pandemic, including travel, leisure and aerospace. “Once these industries have a clear visibility to the other side of COVID, M&A should bounce back aggressively, though that may be closer to 2023,” Healy adds.
With 2021’s favorable capital markets and global growth environment, some companies chose to announce separation and asset divestitures to bring greater strategic clarity to the core businesses. This is a trend that will continue in 2022 as management teams maintain a disciplined approach to shareholder value creation.
In addition, as sustainable investing interest grows, an uptick in M&A related to environmental, social and governance (ESG) strategies could emerge in sectors where there are actionable assets for divestiture or acquisition. "A manifestation of that could be in the energy and natural resources sectors, where an increased ESG focus by the broader investor community could lead to asset portfolio rebalancing to improve a company's environmental footprint," Miles says.
The rapid U.S. economic recovery contributed to record-breaking transaction activity in the region. As global economies continue to improve, and the effects of COVID-19 subside, regions outside of the U.S. could also experience heightened M&A activity, even from strong 2021 levels.
“In EMEA, continued GDP growth and conducive capital markets should support another strong M&A year, especially considering the need for supply chain efficiencies and improved infrastructure or platform integration across continental Europe,” says Colm Donlon, Head of Europe, Middle East and Africa (EMEA) M&A.
“In Asia, we echo many of the same themes highlighted by our U.S. and EMEA colleagues,” says Richard Wong, Head of Asia Pacific M&A. “We are optimistic that the Asia M&A market will remain buoyant in 2022.”
In 2021, deal-making slowed for Japanese companies interested in M&A with corporates outside of the country, according to Atsushi Tatsuguchi, Head of Japan M&A at Morgan Stanley. “Japanese corporates could start to deploy more capital outside of the country, though that may materialize more fully beyond 2022,” he says.
Against the backdrop of a record M&A year, cross-regional transactions remained muted as a percentage of global volume, continuing a trend since 2019. In addition to global geopolitical tensions, pandemic-related restrictions made it difficult for companies to contemplate large cross-border acquisition integrations or complete due diligence spanning country borders.
Cross-border transactions should increase as COVID-19 restrictions ease globally. “As we emerge from COVID, European corporates are looking for broader global exposure and for opportunities to enter higher-growth markets,” says Donlon.
In 2021, sponsor-backed transactions comprised 32% of global M&A volume, surpassing the prior record of 26% in 2020. In particular, sponsor-backed acquisitions last year more than doubled the 2020 volume. This is especially pronounced in public company take-privates, where the average transaction size exceeded $3 billion as financial sponsors increasingly teamed up to write large equity checks. In the last two months of 2021, Morgan Stanley advised on KKR’s $40 billion proposed offer for Telecom Italia; Bain Capital and H&F’s $17 billion acquisition of Athenahealth; CyrusOne’s $15 billion sale to KKR and GIP; and McAfee’s $14 billion sale to an Advent-led investor consortium.
A rising rate environment would have an impact on sponsor returns, but rate rises are currently expected to be moderate in 2022, with the absolute cost of debt capital expected to remain historically low. Secular forces of ample dry powder, along with robust fundraising activities, support continued levels of private equity activity, according to Bill Sanders, Global Head of Financial Sponsors. “While perhaps not at 2021 levels, we expect financial sponsors to march forward putting capital to work, even if financing markets tighten moderately this year,” he says. “Sell-side activities should also stay elevated as sponsors look to lock in gains at attractive valuations and exit their investments in a constructive capital market environment ahead of any potential tax law changes.”
Financial Sponsor M&A Activity ($Bn)
Special purpose acquisition company (SPAC) mergers had a banner year, accounting for approximately 20% of U.S. M&A volume. As the market evolved, activity was more muted toward the second half of the year. Looking ahead, SPAC activity should have staying power, though it’s unlikely to repeat 2021 levels, according to Kristin Zimmerman-Sorio, Head of SPAC M&A. “As it stands, there is still about $160 billion of SPAC capital across more than 550 SPACs waiting to be deployed within a limited timeframe. Given this dynamic, we anticipate a sustained level of de-SPAC activity over the next two years,” she says. In 2022, investors may enhance their focus on the quality, trajectory and valuation of the target company, as well as the credibility of the SPAC sponsor, she adds. “We are also seeing seasoned SPAC sponsors getting more creative around deal structures to drive transaction completion in an environment characterized by increased private investment in public equity (PIPE) and redemption risk.”
De-SPAC M&A Transaction Volumes
In addition, companies taken public by SPACs may naturally seek strategic M&A to accelerate growth. “With access to public equity as an M&A currency, those nascently public companies could take advantage of a conducive equity market environment to advance strategic priorities and gain scale,” Miles adds.