At Datasite’s recent webinar in partnership with the Financial Times and moderated by the FT’s Kaye Wiggins, Merlin Piscitelli, Luigi de Vecchi, and Amanda Scott discussed whether the strong momentum in European M&A will last in 2022.
In her opening remarks, private capital correspondent Wiggins explained that when planning began for this discussion, the M&A world was going full steam ahead. However, the big question now is whether the frenzy can continue, and if so, for how long? In 2021, it seemed that every quarter produced dealmaking volumes that broke all records; in fact, global dealmaking was at its highest levels since records began four decades ago, with low interest rates, booming stock markets, and unprecedented government support driving this activity.
However, four months into 2022 and everything seems to have changed. Vladimir Putin’s invasion of Ukraine, the prospect of significant inflation and interest rate rises, protracted supply chain issues, and the cost-of-living crisis have meant that equity markets have become volatile, leading to stock-based transactions being more difficult. In fact, the first quarter of 2022 has looked a lot like the beginning of 2020: globally, deals in Q1 have been down 23% from the year before, according to Refinitiv data.
The Impact of the Current Crisis on M&A
To kick off the discussion, the audience was asked how strongly they felt the crisis in Ukraine would impact deal flow in the EMEA region. With 68% of the audience stating that it would only have a moderate impact, Luigi de Vecchi, Chairman of EMEA Banking, Capital Markets & Advisory at Citi, said that he found this reassuring, although he is not so optimistic: he pointed to it being a critical time in Europe, which will no doubt impact M&A. de Vecchi strongly believes that an increase in the cost of capital for corporations is inevitable due to the geopolitical risk we are currently faced with.
He predicts that if an escalation of the war occurs, it could put democracies on the other side of autocracies, which would inevitably split the world into two or three blocs: the US, China, and Europe if the bloc pulls together and unites. This would lead to the cost of capital increasing as each individual bloc brings home the likes of manufacturing and we could see inflation rise followed by rising interest rates.
For these reasons, and the fact that M&A has always followed equity markets in the index, he believes that the war will have a more lasting and significant impact.
Opportunities for Dealmakers
On a more positive note, however, de Vecchi pointed to the significant opportunities ahead for dealmakers. The latter was echoed by Amanda Scott, Managing Director and Global Mergers & Acquisitions Leader at Willis Towers Watson. She pointed to the fact that purpose remains a key decision when it comes to M&A, as businesses are attempting rapid transitions related to climate, technology, and DE&I.
With a continued focus on supply chains, the war in Ukraine, the pandemic, social unrest, cyberattacks, and the climate emergency, many organizations are trying to achieve self-sufficiency in their products and services. These have all created a desire for organizations to be very purposeful and specific about the types of acquisitions that they are making.
Scott pointed to ESG being an absolute priority for top CEOs, as reputational risk, alongside compliance risk, is keeping them awake at night. DE&I is becoming part of the bread and butter of what organizations are thinking about and what they are doing. At Willis Towers Watson, they are seeing a huge demand in the employee experience, recognition, and reward programs, as well as culture.
She predicts that ESG will be a main driver for deals and that this alone will continue to help keep up the momentum of the M&A market. Organizations, rather than trying to internally adjust to their own desired ESG metrics, are going to think creatively about divesting, joint ventures, or acquiring certain business units to prioritize and improve their own metrics.
Merlin Piscitelli, Chief Revenue Officer EMEA at Datasite, agreed with de Vecchi that if things escalate it could be extremely impactful on the M&A market.
However, Piscitelli was more optimistic and agreed with Scott that dealmakers are, in fact, creative people: when the marketplace is preventing deals from being done, dealmakers become creative. The impact on supply chains and energy due to the war, he predicts, will lead to investments shifting. And with this shift, there is room for optimism as investments drive M&A.
Deal Data Remains Positive
From the data perspective, Piscitelli argued that there are even more reasons to be optimistic. Datasite’s stats for the first quarter (financial year starting February 1) show a very strong start to the year.
In EMEA last month there was an all-time record on the number of new projects that were started. And since the start of Datasite’s financial year, 3,500 new projects globally have been recorded, 1, 500 of which were in EMEA. Datasite’s Prepare platform has seen 800 projects start this year, meaning that the pipeline is still strong. And looking at data from this time last year, EMEA is up 22% on new projects, and globally up 8%.
So, from the current data and overall expert sentiment, M&A is happening and M&A will continue to happen. While there has been a blip, let’s hope the situation may not actually be as dire as some of the headlines might suggest.