Global mergers and acquisitions break records and reach US$ 5 trillion

The global market for mergers and acquisitions (M&A) broke all records in 2021 and easily surpassed the value established almost 15 years ago, as the abundance of capital and sky-high valuations fueled frenzied levels of trading.

For the first time in history, the global value of M&A surpassed US$5 trillion (about R$28.7 trillion). Volumes grew 63% to $5.63 trillion (BRL 32.31 trillion) as of Dec. 16, according to data from the Dealogic finance platform, and the numbers easily surpassed the US pre-financial crisis milestone. $4.42 trillion (BRL 25.37 trillion) from 2007.

“Company balance sheets are incredibly healthy, with $2 trillion (£1.48 trillion) in cash in the US alone, and access to capital remains widely available at very low costs,” said Chris Roop, co-director of M&A from JPMorgan for North America.

The technology and healthcare sectors, which typically account for the largest share of the M&A market, took the lead again in 2021, in part because of pent-up demand last year, when the pace of mergers and acquisitions fell to the lowest of the three recent years due to the global financial crisis caused by the Covid-19 pandemic.

Companies scrambled to raise funds with stock and bond offerings, large corporations took advantage of the booming stock markets to use their own shares as buyout currency, while financial sponsors swooped in on publicly traded companies.

Additionally, solid corporate earnings and an optimistic economic outlook have given executives the confidence to pursue big, transformative deals despite possible headwinds such as inflationary pressures.

“Strong equity markets are one of the main drivers of mergers and acquisitions. When stock prices are high, it usually equates to a positive economic outlook and high CEO confidence,” explained Tom Miles, Morgan Stanley co-director of M&A for the Americas.

Total US business volume nearly doubled in 2021 to $2.61 trillion ($14.98 trillion), according to Dealogic. Trading in Europe jumped 47%, to US$ 1.26 trillion (BRL 7.23 trillion), while in the Asia-Pacific region there was growth of 37%, to US$ 1.27 trillion (BRL 7.28 trillion ).

“Although China’s international activity has been modest, companies from other Asian countries have intensified their purchases of global assets. We expect this trend to continue, especially in the case of transactions in Europe and the United States,” said Raghav Maliah, Global Vice President of Investment Banking at Goldman Sachs.

Some of the biggest deals of the year were announced during the first half of 2021, such as AT&T’s $43 billion (R$246.8 billion) deal with Discovery and the $34 billion leveraged buyout of Medline Industries. $195.1 billion). However, the pace of negotiations showed no signs of deceleration in the second half.

On November 21, private equity firm KKR made a bid for Italy’s largest telecom operator, Telecom Italia, valued at around US$40 billion (R$229.6 billion) including net debt, and ranked as the highest Europe’s largest private equity acquisition and the second largest in the world, if it takes place.

The availability of financing boosted private equity investor activity, with volumes more than doubling from last year, to a record $985.2 billion (R$5.6 trillion), according to Dealogic.

“Investors are investing at an unprecedented pace, which means asset valuations have reached historic levels globally,” said Luigi de Vecchi, chairman of Citigroup’s European, Middle East and Africa capital markets board.

“The question is whether the prices paid now will continue to make sense over time.”

Under pressure to make their companies greener and more sustainable, executives have been looking for targets with the right climate credentials.

“Along with technology and digital transformation, sustainability is here to stay, and it is the main focus of most councils”, commented de Vecchi, from Citi.

Payday

After a year of lockdowns, Wall Street’s leading investment banks pressured their professionals to find more clients personally and thus obtain more lucrative mandates, to merge companies or defend them against attacks by activist investors.

“We are expected to exceed $100 billion (BRL574 billion) in global investment banking fees this year,” said Berthold Fuerst, co-head of global mergers and acquisitions at Deutsche Bank.

“There has been unprecedented demand for almost all investment banking products,” he said.
After a record year, bankers now expect a big bonus payout round in early 2022.

The break-up of corporate empires and conglomerates also proved a lucrative business for investment banks.
In the second half of the year, General Electric, Johnson & Johnson and Toshiba were among the big companies that announced plans to fragment their core businesses and separate several units.

Transaction flow shows no signs of slowing, with companies and investors rushing to close deals ahead of possible interest rate hikes.
Borrowing costs are expected to rise in the coming months as the Federal Reserve, the US central bank, has indicated it will raise rates next year to fight rising inflation. Even so, bankers expect negotiations to remain robust.

“I don’t think the upward movement in interest rates alone will be the catalyst that will deter the market from mergers and acquisitions,” said Miles of Morgan Stanley.
Leading advisers are concerned about the consequences of the US Federal Trade Commission’s (FTC)’s increasingly hostile stance toward M&A activities over the past year. An example of the latest deals the FTC is trying to block is Nvidia’s acquisition of British chip maker Arm, for $40 billion.

“The FTC and the Department of Justice are taking longer than ever to evaluate the deals, so companies interested in mergers and acquisitions must be ready to discuss their business with regulators at any time,” said Krishna Veeraraghavan, M&A partner at the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP.

He added that companies will have to wait longer to close a deal – up to a year and a half instead of the usual 6-12 months – and must enter into a merger “willing to sue”.

Despite all the headwinds, the coming year still offers many opportunities as the market for special purpose acquisition companies (SPACs) has recently reopened with new listings in Europe after undergoing regulatory scrutiny in the United States.

“With the private equity market and liquidity in the SPAC world, we expect this momentum to continue into 2022,” commented Philipp Beck, M&A director at investment bank UBS for Europe, Middle East and Africa.