The key question at the present time is ‘what’s next for M&A’? Ever since the financial crisis, the M&A market has been strong, driven by a favourable economic backdrop, a large pool of liquidity and fundamental structural dynamics being driven by digitalisation and more recently by the move towards net zero. This strength in activity has only ever been seriously held back by the pandemic, which was – at least for M&A – a relatively short lived affair. At no time in the last decade have we faced as many headwinds as we do now, but how will the M&A market adapt?
Any reasonable commentator wouldn’t look too far beyond H1 when predicting which way the market will go. There’s too much uncertainty about how global events will play out, particularly the impact of sanctions and central bank reaction to rising inflation.
On the latter point, we expect that much of the inflationary pressure is already factored in to decision making and, without a sustained period of interest rate increase to levels not seen since before the financial crisis, with capital still being relatively inexpensive to access and private capital holding huge amounts of dry powder, the market will adjust to this ‘new normal’ over the coming months to find an equilibrium between buyer and seller expectations for the pricing of deals. No one, however, can confidently predict what will happen with regard to Russia and Ukraine, and this could be what really dictates corporate activity going into H2, especially if supply issues remain.
We do expect corporates to be constantly reviewing their operating structures, particularly towards the end of the year as they search for efficiencies to find profit if growth slows. Group performance will be firmly under the microscope.
‘We do expect corporates to be constantly reviewing their operating structures, particularly towards the end of the year as they search for efficiencies to find profit if growth slows.’ Richard Moulton, Eversheds Sutherland
There are perhaps more long-term themes driving corporate activity. One longer lasting effect of the pandemic was the acceleration on foreign investment regimes giving governments more of a say over M&A activity, and a much broader definition over assets that fall within the scope of review. See the UK’s NSI Act and the US CIFIUS as two examples. It’s not that we are seeing these regimes dampen activity, but we are seeing them impact timelines within deals and the theme that underpins the need for such regimes, is worth watching.
Finally, we’re yet to see ESG really make its mark as a driver of corporate activity, even after COP 26. We don’t expect this to continue in the long-term. Investors are increasingly focused on building the net zero economy and these issues will increasingly be a focus for where they plan on investing their money. We believe assets that have the right sustainability credentials and are underpinned by positive social reputations will be value drivers within M&A.
In closing, the M&A market has been resilient over the past decade and it is my strong belief that we will see, at least in the first half of 2022, a market on standby; observing events and altering strategies, but ultimately with a growth mindset and cash to support it.