The global M&A market defies gravity in the second half of 2021

The global market for mergers and acquisitions continued its spectacular ascent in the second half of last year, outwitting observers who thought it was nearly impossible to defy gravity for so long. The value of big deals
rose 67 percent over the year, peaking at $5.9 trillion, as corporations, private equity firms (PEs), and special purpose acquisition companies (SPACs) provided nearly 11,000 large deals, a 37 percent more than in 2020.

The Russian invasion of Ukraine has clearly changed the mood, triggering not only a humanitarian and geopolitical crisis, but also the kind of shock that served as a warning as pundits tried to weigh how long high levels of mergers and acquisitions might continue. While it is difficult to look around the corner with confidence in the face of this type of uncertainty, we expect the strategies that have supported traders in other challenging markets to continue to outperform the alternatives here.

But first, there’s still a lot to learn from 2021.

According to our M&A practice review of the global M&A market, dealmakers in the Americas closed the year as the most active traders, accounting for more than half of the value of M&A deals worldwide. the world (52 percent), followed by Europe, the Middle East and Africa. (26 percent) and Asia-Pacific (22 percent). Corporations continued their pandemic-enhanced scrutiny of business portfolios, aided by corporate leaders who found new reserves of time and attention by calling meetings, rather than competing for planes. The resulting increase in corporate M&A activity accounted for nearly 75 percent of the value of all large companies changing hands globally in 2021.

But PE companies were not far behind. Throughout the year, they continued their ferocious climb, raising the value of PE deals by 98%, to $1.5 trillion, a figure that would have seemed unfathomable not too long ago. Fueled by successful “buy-and-build” acquisitions that have become increasingly common in this space, PE companies were not only prodigious buyers but also surefire ones, driving the average value of PE transactions up 44 percent. , at $1.3 billion.

PE firms weren’t the only hulking dealmakers. With all the gear changes in the global economy and consumer behavior, many companies continued their dogged pursuit of digital transformation, helping to secure the position of the technology, media and telecommunications (TMT) sector as the giant of the mergers and acquisitions industry.

TMT increased its share of global M&A activity to 34% of deal value from 30% a year earlier, and accounted for the top six deals of the year (led by Discovery-Warner Media, valued at over $96 billion, more than double the next largest deal). In reclaiming this ground, TMT continued a near-steady five-year rise that saw it far outshine the next five largest sectors in M&A (real estate, followed by industrials, energy, healthcare, and financial services). None of these sectors accounted for more than 11 percent of the global market in 2021.

Says Oliver Engert, global co-leader of McKinsey’s M&A Practice, “M&A had an absolutely amazing year in 2021. We broke all previous records. The massive contraction of the markets in 2020 caused a huge pent-up demand, which was unleashed in the third and fourth quarters and extended into 2021. Also, with the COVID-19 pandemic, corporations began to rigorously review their assets. Some needed to raise cash quickly. Others took the opportunity to clean up their properties. That led to a rich pool of assets becoming available just when many companies had strong balance sheets, cash flows and earnings potential, and needed to buy.”

Adds Andy West, global co-leader of McKinsey’s M&A practice: “The thing that surprised me most about trading in 2021 was the sheer volume. When people are unsure about valuations, the economy, or industry performance, they tend to pump the brakes. We certainly saw some of that in early 2020. But the uptick has been shocking.”

Also underpinning 2021 M&A activity was a potentially more accommodating regulatory climate than the current environment, coupled with infusions of stimulus, favorable interest rates, more favorable tax environments and rising commodity prices, as well as support from PE investors and some SPAC money, says Oliver. . PE firms have become formidable players in the M&A cycle, not only because of deep pockets and finite investment horizons, but also because of their ability to decouple themselves from quarterly earnings requirements, allowing for a greater freedom to restructure holdings to reach new performance frontiers. “We have seen some wonderful financial returns from these companies. That positive track record only fuels more activity.”

Net-net: The 2021 M&A market had plenty of sparks and plenty of tinder waiting to be ignited.

The outlook for 2022 has become more complicated. Despite new and profound questions about geopolitical stability, previously established headwinds and tailwinds remain powerful forces. Potential challenges include rising inflation, rising taxes and increased regulatory scrutiny, in addition to geopolitical risks and rising nationalism. To counteract these challenges, there are well-established strategic shifts that support transactions. These include corporate adoption of increasing digitization, supply chain and environmental upgrades, and a more hands-on approach to portfolio management.

So how can traders deal with this complex web of market forces?

“We know that programmatic acquirers consistently deliver more value with less risk than any other M&A approach,” says Andy. “This means doing M&A consistently over time at a level relevant enough to accelerate strategy (about two small to mid-sized deals a year building up a significant amount of market cap).

“The pandemic highlighted the importance of a full-cycle mindset towards mergers and acquisitions. Companies that remained programmatic performed better. They were nimble, nimble, and willing to invest behind the strategy and its pivots through mergers and acquisitions. The last few years have been a validation of what we have learned from previous recessions.”

In addition to the programmatic strategies that have prevailed through more than a decade of M&A cycles, according to McKinsey research, there are other defenses for times of uncertainty.

“Mergers and acquisitions are simply a lever to seek growth. If stock markets become unstable, premiums become too expensive, or uncertainty exists, other vehicles to consider include alliances, joint ventures, partnerships, or even ecosystems you establish with other players who are interested in the same space. Oliver says, adding: “It’s important to come to the table with a portfolio of transaction vehicles.”

The pandemic highlighted the importance of a full-cycle mindset toward mergers and acquisitions. Companies that remained programmatic fared better: They were nimble, nimble, and willing to invest behind the strategy and its pivots through mergers and acquisitions.

andy west

One thing is certain: Regardless of what the market offers, excellent execution remains essential and within reach. Stick to the fundamentals, be clear about growth expectations and organic and inorganic sources of growth, Andy and Oliver suggest, and use mergers and acquisitions as an enabler of well-defined strategies. Improve target identification through new technologies like AI. Don’t get caught up in the business rush and never overpay. Understand where synergies and capital efficiencies will come from.

And when a deal is signed, make sure the integration runs smoothly from day one through day 100 to final asset integration. Exceed the expectations of creating value in the market. Then establish a healthy new business with the operating model, organization, talent, governance, and culture that support the logic and strategy of the deal.

When dealmakers can meet those objectives, the odds of success are greatly increased, along with the likelihood of capitalizing on whatever comes our way in the global M&A marketplace.

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