Strong economics and key drivers powered dealmaking in 2021 and many of these factors will continue to fuel the feverish pace of M&A.

New research shows that global M&A reached an all-time high of US$5.9tn in 2021 as dealmakers charged ahead with bigger and bolder deals in a frantic search for growth and stability. This was a 62% lift in values from 2020 and reflected, at least in part, a growing number of larger deals. Deal volumes also ticked upwards in 2021, with 34,128 transactions worldwide compared to 34,006 in 2020.

There are good reasons to expect healthy levels of M&A going forward. As the global economic recovery continues, many corporates are looking to refocus their strategy for the changed market landscape, particularly in the context of digital transformation. Moreover, new imperatives for M&A have emerged. The need to confront climate change and other societal issues is now firmly on the boardroom agenda. The global battle for talent is forcing many organisations to think again about how they secure the skills they now need.

The full research report, “Global dealmakers 2022: M&A market update”, drills down into the details of last year’s M&A market and assesses the trends, challenges and opportunity areas that will drive deals in the year ahead.

Deal drivers

Underpinning that M&A growth story, central banks worldwide have kept monetary policy unusually loose to support recovery, so financing has rarely been as affordable. In the past two years, US Treasury yields have not exceeded 2%, and were below 1% for much of 2020. However, there are several other key structural and strategic factors currently driving deals on a global scale:

Cross-border M&A. Many corporates are looking for ways to regain momentum. In a low interest rate environment and with many economies still facing stiff headwinds, executives anticipate only modest organic growth. Accordingly, they are turning to international M&A to enter new markets and geographies. Cross-border M&A rose markedly and outpaced domestic transactions last year, increasing 77% in value in 2021 and 5% in volume terms from the year before.

ESG. The importance of environmental, social and governance (ESG) factors is another sweeping trend. With disparate groups of stakeholders – governments, regulators, investors, customers, and employees – demanding new focus on issues such as sustainability and diversity, many corporations have been forced to reconsider their portfolios. Increasingly, they are committing to adapt deal strategies to sustainability and long-term value creation.

Mega deals. With growing numbers of companies now looking to take genuinely transformative decisions about the future of their businesses, mega deals have become more common. The number of M&A transactions with a value of at least US$500m rose by 69% in 2021 compared to the previous year. Organisations’ leaders are increasingly ambitious, embracing M&A as a route to rapid and substantive change.

The war for talent. Covid-19 has led to the “Great Resignation”, with millions of workers worldwide rethinking life and work choices. A crisis that began amid fears of mass unemployment is now triggering labour shortages in developed economies. Dealmakers are turning to M&A to solve their talent problems.

The mid-market opportunity

Mid-market transactions (valued between US$15 and US$500m) also posted noticeably increases as dealmakers leveraged the strong fundamentals and track records of these businesses to expand into new markets. In both volume and value terms, mid-market M&A rose in 2021 to some of the highest in more than a decade. Mid-market deals in 2021 accounted for 31% of global transactions, increasing from 25% in 2020.

Dealmakers have traditionally turned to mid-market deals as a source of fast-tracked growth. These companies, having successfully grown from start-up to mature businesses, typically have strong, positive fundamentals to add value to larger organisations. Their implementation and uptake of new technologies in many cases has allowed them to excel and become leaders in their business spaces. As the pandemic continues to put pressure on companies to grow, many are turning away from small-cap plays to mid-market deals to enhance their growth into new product segments and geographic markets.

Mid-market deals are also more straightforward from a regulatory perspective. That is particularly relevant in the context of the tougher line on dealmaking that competition authorities are currently taking in key markets.

Outlook 2022

None of the key drivers analysed in the research appears to be dissipating in strength, rather, many are accelerating. The ESG agenda, for example, was given extra impetus by the COP26 climate change summit in Glasgow in November 2021. The imperative for digital transformation is only gaining momentum. And with the recovery in many economies following the bounce-back from the pandemic, for many organisations cross-border opportunities represent the best chance to achieve growth.

Moreover, new factors are emerging. For one thing, there is the growing possibility of distressed M&A. While governments protected corporates during the Covid-19 crisis, offering a range of generous supports, most are now stepping back, and distressed dealmaking is now on the increase. This may be a notable M&A theme for 2022.

As recent history continues to demonstrate, challenges can arrive abruptly and upend expectations. This was the case with the Covid-19 pandemic, and more recently with the dramatic escalation of events in Ukraine. Indeed, the escalation into war in Ukraine and the fall-out from sanctions, higher energy costs and wider uncertainty, once again has the potential to reshape the dealmaking environment.

Additional key findings from the research include:

• Mid-market stats: Mid-market values rose to US$1.2tn in 2021, a 40% increase from 2020. Volumes likewise increased year on year, rising 24% to hit 10,523 deals
• North America leads rebound: North America was the top region by M&A deal value in 2021 at US$2.9tn
• Asia Pacific – Strong economics: Asia Pacific was the top region by M&A deal volume in 2021 at 11,589 deals
• Sector spotlight: Tech M&A accounted for 33% of deal value and 36% of deal volume in 2021.