The global M&A record has been smashed. Aggregate deal value broke the US$5tn barrier to reach US$5.7tn in 2021, easily surpassing the previous high of US$3.9tn in 2015. Records also tumbled for deal volume, with 25,982 transactions. It was the year of the trillion-dollar quarters, as aggregate global value topped US$1tn in every quarter for the first time.
What’s been driving this deal bonanza? Firstly, rock-bottom interest rates to make borrowing cheap. On top of this, stock markets held strong from mid-2020 through 2021. These provided both the firepower for corporations to pay for assets, and the confidence that corporate executives needed to make those big decisions. In short, the stars aligned for deal activity.
But even that wasn’t all. The pandemic, far from being a deal doom-monger, served to boost the rush for digitalization. The resulting high valuations for prized assets – especially in technology – stoked yet more activity as sellers seize their chance to exit at rich multiples.
Today, the M&A ship may seem unsinkable. But as ever, it’s prudent to look for clouds on the horizon in 2022. For instance, January has seen some stock market volatility, even though the S&P 500 remains well above its pre-pandemic levels.
Persistently high inflation is a potential iceberg. The US’s consumer price index rose by 7% in 2021, the highest rate in nearly 40 years – defying earlier optimism that rising prices would be transitory. And of course, the usual weapon against inflation is to raise interest rates. The US’s Federal Reserve (like many central banks around the world) is now weighing up this strategy, with Fed chair Jay Powell indicating in late January that he is willing to take an aggressive stance to fight inflation.
Nevertheless, even assuming an interest rate rise, borrowing costs will still be extraordinarily low by historical standards. This, combined with PE’s large stores of dry powder, should keep dealmakers sailing on through reasonably calm seas.
Moreover, those compelling reasons to do deals haven’t gone away. Trends such as digitalization and the energy transition have only been accelerated by the COVID-19 pandemic. Although 2021 may have been the peak of deal activity, there is now a momentum in the M&A market that shows little sign of weakening. Savvy dealmakers will be only too ready to ride this tide.