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Published in Finance

PE deals expected to drive record-breaking year for M&A in 2022

BY Sunday, November 21, 2021 06:00pm

recovering U.S. economy and readily available capital to finance deals are expected to drive M&A activity even higher in 2022.

Those two factors ranked as the top deal drivers for next year in an annual outlook survey conducted by law firm Dykema Gossett PLLC.

Private equity investors in particular will likely drive M&A activity, said Tom Vaughn, co-leader of Dykema’s Mergers & Acquisitions practice in the firm’s Detroit office.

“We see more and more PE funds out there raising capital, and they need to get that capital out,” Vaughn said. “The PE phenomena is just a different market dynamic. We’ve seen over the last five-plus years that this amount of capital is driving activity, no matter what’s going on in the marketplace.”

Private equity deals across the U.S. have been trending higher for years. Both the number of deals and their collective value grew in every year but two in the last decade — including 2020, when M&A activity was curtailed by the COVID-19 pandemic, according to a quarterly report from Pitchbook.com.

Despite the pandemic, 2020 still saw 5,688 private equity deals in the U.S. that totaled $698.4 billion, which was more than in any other year in the past decade except for 2018 and 2019. The Pitchbook report noted that the “PE dealmaking climate continues to be extremely bullish across the board, from smaller add-ons to mega-deals” of $1 billion or more.

Pitchbook estimates that the U.S. had 6,004 private equity deals through the third quarter this year totaling $787.6 billion, and that PE was headed for a record-breaking year in 2021.

The Dykema outlook survey indicates that financial buyers will have the most influence on the M&A market in 2022.

“When you look at the statistics out there, this is going to be the biggest year of PE activity that we’ve ever seen,” Vaughn said. “I don’t think there’s any reason to expect that segment of the market to change in the coming year.”

‘Bullish outlook’

Dykema’s annual outlook survey points to a “resounding” and record-breaking year ahead for M&A.

Three-quarters of the 266 senior business executive executives, M&A professionals and advisers across the U.S. who were surveyed in September said they expect the U.S. market to strengthen in 2022. Higher deal flow is expected to occur across the board, from small and mid-market transactions to deals valued at $1 billion or more, according to survey responses.

“2022 looks to be another great year for M&A activity in the U.S.,” Dykema corporate finance attorney Eric White said during a briefing on the outlook survey.

The “bullish outlook is particularly strong for privately owned businesses,” according to Dykema’s outlook. Nine out of 10 survey respondents expect more deals next year involving privately owned companies.

Among respondents, nearly three-quarters said they expect their company or a portfolio company, or a business that they advise, to become involved in an acquisition in 2022. Nearly two-thirds expect to get involved in a joint venture, and 56 percent expect a sale.

The market optimism comes despite concerns about economic uncertainty and inflation, President Biden’s legislative agenda, and resurging COVID-19 cases.

“We are in one of the hottest, if not the hottest, M&A market that I’ve seen in my career,” Vaughn said. “Nothing could dampen the enthusiasm of our respondents, and they believe that nothing can slow the pace of M&A in the next year.”

Dykema also found optimism about the U.S. economy. Seven out of 10 respondents hold a positive outlook for the economy over the next year, an increase of 10 percentage points from 2020’s M&A outlook survey.

Top M&A sectors, concerns

Meanwhile, automotive, energy, financial services, technology and media, and health care rank as the top five most-active sectors for M&A in the next year, according to Dykema’s outlook survey. 

The automotive industry ranked as the top sector for anticipated M&A for the fourth straight year. Energy — cited as the second most-active sector — moved up from eighth in last year’s survey, reflecting the increased interest in renewable energy, as well as electric vehicles and the associated infrastructure, Vaughn said.

“Renewable energy is now just becoming a normal industry. It’s no longer an emerging industry. It is becoming a standard industry that people expect to see,” he said.

The pandemic and resulting supply chain problems and labor shortages were viewed as the top concern for M&A going into 2022. Despite those concerns, Vaughn believes “people have learned how to deal with the uncertainty and the challenges that COVID-19 presents.”

Other top challenges for M&A in the next year include Biden administration tax policies, China trade tensions, inflation concerns, and increased regulatory scrutiny of cross-border deals and mergers for anti-trust issues.

Interestingly, 44 percent of survey respondents cited COVID-19 as having a “significant” or “somewhat positive” effect on deal flow. That result indicates that “dealmakers are successfully adapting to COVID-19 and other obstacles,” said Cynde Munzer, a corporate finance attorney at Dykema’s Chicago office.

Video conferencing platforms such as Microsoft Teams and Zoom that M&A professionals turned to during the pandemic “can personalize negotiations and bring more stakeholders into the conversation, ultimately speeding up the conversation when compared to traditional conference calls,” Munzer said. 

The platforms have proven to “really enhance the speed in negotiations in getting deals done and getting everyone to the table,” she said.

“Today, the widespread adoption of virtual work may increasingly be facilitating, rather than hindering” deals, Munzer said. “Wherever they are in the world, you can get 20 people together so quickly. That’s been a real positive for M&A.”

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