The M&A Frenzy May Be Over – But That’s Not a Bad Thing

Higher financing costs and lower economic growth could slow the number of corporate tie-ups, but experts believe deals may end up healthier.

Munshi Ahmed/Bloomberg

Munshi Ahmed/Bloomberg

After hitting records in 2021, deal-making looks like it may be coming down to earth this year.

In 2021, the total value of mergers and acquisitions reached an all-time high of $5.9 trillion, up from $3.7 trillion the year before, according to a report on global M&A in 2022 from Bain Consulting. In January, however, the number of M&A deals declined for the first time in almost two years, according to data from II’s sister company, BCA Research. In a daily briefing, BCA noted that the dimming M&A outlook is a result of decelerating economic growth, sluggish equity returns, rising interest rates, and strong regulatory headwinds.

“The environment is now less conducive for mergers and acquisitions,” according to BCA. “This is compounded by the fact that the number of M&A deals over the past 12 months far exceeds previous peaks, which raises the likelihood that dealmaking activity experiences a mean reversion.”

But the slowing tempo of deal-making is not necessarily a negative signal. “The second half of [2021] was frenzy, absolutely,” Brad Armstrong, partner at private equity firm Lovell Minnick Partners, told II. But “it doesn’t feel that way now. It feels more steady, more mature, more healthy in terms of the pace.”

Robert Brown, CEO of Lincoln International, said the M&A market this year is unlikely to be as “white-hot” as it was in 2021. That’s because the record-breaking M&A flow in 2021 was driven in part by the pent-up demand for deals during the depths of the pandemic. Founders and CEOs were also expecting higher tax rates on capital gains in 2022, which prompted many of them to race for partners.

Despite any slowdown, Brown remains optimistic about M&A. After such a busy year, dealmakers would normally expect a pause in transactions. But that did not happen last month, he said. Lincoln International, the Chicago-based investment bank, closed as many deals in January as it did in previous months. The continuing interest has been fueled by the record amount of capital raised in the last ten years, he said. At the same time, there’s still a relatively small number of high-quality companies available to be acquired, according to Brown.

“The main driver of M&A activity, which is capital availability and business performance, [remains] strong,” he added.

A number of surveys support the optimism. Eighty-nine percent of M&A decision-makers expect their deal-making activities to stay the same or increase in 2022, according to Bain Consulting’s report, which included a survey of 281 M&A practitioners in late 2021. Eighty percent of respondents said mergers and acquisitions are an integral part of their growth strategies. Ernest & Young found that 59 percent of more than 2,000 CEOs across the globe had the intention to pursue acquisitions in 2022.

“I think that although the environment [for M&A] has gotten more complex – supply chain disruptions, increasing geopolitical tensions, engaging in the war for talent, etcetera – the overall outlook remains very positive,” according to Pete Witte, global private equity lead analyst at Ernest & Young.

Witte added that rising rates could be one of the major concerns for dealmakers as they increase financing costs for borrowers. But at the same time, “valuations – especially for the most attractive assets – have been very high for a long time,” Witte told II. “And so to the extent that higher rates would indeed increase financing costs, the negative impact could be offset – at least to a degree – by a decrease in entry prices. And that’s something that market participants will be watching very closely.”