High global M&A value may see more cautious investment

12 January 2022 Consultancy.uk 3 min. read

Merger and acquisition deal value reached historic highs last year – and 2022 looks set to see this trend continue. This huge inflation also places greater pressure on deals to achieve a return on investment quickly, however, which may see buyers become more cautious.

Across all deal types, 2021 was a bumper year. A rebounding economy and heating M&A market has seen strategic M&A multiples reach an all-time high – but this spike in demand has also seen valuations significantly rise over the last year. As a result, corporates are paying more than ever for their targets, as they seek to navigate a rapidly changing and in many cases disruptive landscape.

According to the latest research on completed deals from Willis Towers Watson’s Quarterly Deal Performance Monitor (QDPM), this saw the number of mega-deals in the last 12 months boom. Looking only at M&A deals with a value of at least $100 million, the researchers found such global activity breached new heights, with more than 1,047 completed deals of that size in 2021. This represents a significant increase on the previous year, 674, and is the highest annual volume since the firm’s analysis began in 2008.

M&A Quarterly Analysis Volume (number)

There are no signs of this feeding frenzy slowing in 2022, either. The final quarter of the last year was the busiest of 2021, coming close to 300 deals worth over $100 million for the first time since 2015.

Looking ahead, Jana Mercereau, Head of Corporate M&A Consulting, Great Britain at Willis Towers Watson, said that the M&A boom looks set to continue, as its contributing factors add more fuel to the fire. Abundant investment capital, strong equity markets and cheap debt mean that companies feel now is a favourable time to invest – even if the premium they are paying is a hefty one. However, this may not last long if prices continue to inflate at their present rate.

Mercereau added, “M&A data coming out of North America also highlights the impact that historically high asset valuations, pushed up by competition and increasing complexity, can have on deal performance. The question is whether prices being paid now will continue to make sense over time.”

M&A Regional Analysis

The number of deals in North America peaked in the second quarter of the year – and while it remains high, it seems buyers in the region are becoming more cautious. In the fourth quarter, as prices continued to spike, it proved more difficult for companies in the region to enjoy returns on their investments.

In the final quarter, North America’s investors saw acquirer returns tumble from 2020’s levels due to the heightened price paid. According to Willis Towers Watson’s analysis, these fell from 5.9% to -3.4% in 2021. While North America’s acquirer returns were still much higher in 2021 than 2020 overall, returns are still low at around 0.5%.

While the situation is less extreme in Europe, there also seem to be signs that such a slowdown could be on the cards there. Europe’s deal activity similarly peaked in the middle of the year – and while its fourth quarter’s returns were improved on 2020’s figures, acquirer returns for the year fell from 12.2% to 3.9%.