2022 Is a Seller's Year for M&A

2021 Was a Record Year

In 2021, dealmakers worldwide announced $5.6 trillion in M&A transactions (that’s 30% higher than the previous record), and the U.S. reported $2.9 trillion in transactions (that’s 40% higher than the previous record). While 2021 may have been a record-breaking year for middle-market M&A activity, 2022 should be an excellent year for sellers. 

Last year several factors drove deal activity to new heights:

• Pent-up activity from the previous slow year because of the COVID-19 pandemic
• A wealth of capital seeking investment opportunities
• Potential tax changes this year
• Strong economic growth
• Continued low-interest rates

Why 2022 is the Year to Sell

So, if 2021 was so great, why is 2022 likely a better year to sell your company? There are quite a few reasons.

Firstly, in the U.S., anticipated tax changes caused many business owners to sell in 2021 to avoid higher taxes. With all the tax-motivated selling that took place last year, there will be fewer deals available to buyers this year, which makes it a better market for you to sell because more acquirers will have more time and energy to review the potential of your deal and interest in quality companies will be at a high. 

Next, companies have healthy balance sheets, and there is still a ton of private equity capital available to invest in opportunities. And for now, interest rates are still low, which drives demand. As of halfway through 2021, all that capital raised by private equity in the U.S. that had yet to be invested hit a record of $829 billion. This capital will need to be invested within the next two to three years. Also, PE firms are positioned for another strong fundraising surge in 2022 following an unusually hot year for exits, along with largely positive performance for portfolio companies in existing funds. 

Strategic buyers are expected to stay aggressive in their pursuit of targets this year. During 2021, the disclosed deal value for global strategic M&A activity was up almost 60%, to a record level of $3.3 trillion. Periods of high levels of corporate M&A activity usually maintain momentum as companies respond to deal making in their peer groups. For instance, after the 2015 peak year for strategic acquisitions, disclosed value for such deals in 2016 was higher than any year from 2008 to 2014. That exceeds the annual average for that period by nearly 50%.

Lending markets are positioned to finance M&A during 2022. After record fundraising in 2021, direct lenders are expected to play an even larger role in both the middle and upper markets, including a growing number of hybrid financings. While the U.S. Federal Reserve is signaling monetary policy tightening during 2022 to contain inflation, increases in lending market interest rates should be gradual and rising from historically low levels.

Another reason 2022 will be different is because M&A transactions were taking longer to get done in 2021. After all, key parties were overwhelmed, financing sources backlogged, and service providers stalled. These pressures will be eased in 2022, making it easier to get deals done in a timely manner. Plus, sponsors that backed out of transactions last year due to overcrowding or other factors are likely to return their portfolio companies to market in 2022.

Additionally, the economy appears to be recovering in 2022 and is expected to continue to do so as supply chains bounce back, product supply grows, and the impacts of COVID lockdowns fade into the past. And many companies will need to restock their inventories, driving the economy further and boosting the overall M&A market and multiples.

Fundamentals are in position for strong corporate M&A demand in 2022. Recent surveys in the U.S. and Europe show that the confidence levels of corporate management teams are at a historic high. There are compelling reasons to target certain companies, such as the post-COVID environment afflicted by labor shortages and other issues. 

There are also still some prevailing reasons for M&A deals that always drive demand, such as the need to develop new products, save money, get the edge over the competition, improve operating models, acquire innovation, and make the most of a combined customer base.

Companies that go to market in 2022 should see significant benefits because of higher multiples, more buyers looking for deals, and a better deal-making environment that allows for better efficiency.