McKinsey Pipeline Capital M&A

McKinsey sees 2021 as exemplary for M&A, but awaits 2022 for new projections

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Text by Pyr Marcondes, Senior Partner at Pipeline Capital Tech.

The global mergers and acquisitions market continued its spectacular climb in the second half of last year, outpacing observers who thought defying gravity was nearly impossible for so long. The value of large deals increased 67% year-on-year to $5.9 trillion as corporations, private equity (PE) firms and special purpose acquisition companies (SPACs) entered into nearly 11,000 large deals – an increase of 37% compared to 2020.

Russia’s invasion of Ukraine has clearly changed the mood, triggering not only a humanitarian and geopolitical crisis but also the kind of shock that served as a warning when experts tried to gauge how long the high levels of mergers and acquisitions might continue. While it’s hard to look around with confidence in the face of this kind of uncertainty, we expect the strategies that have supported traders in other challenging markets to continue to outperform the alternatives here.

But first, there’s still a lot to learn from 2021.

According to our M&A Practice’s analysis of the global M&A market, dealers in the Americas ended the year as the most active traders, accounting for more than half the value of M&A transactions worldwide (52%), followed by by Europe, Middle East and Africa (26%) and Asia-Pacific (22%). Corporations continued their scrutiny of business portfolios more matured by the pandemic, aided by corporate leaders who found new reserves of time and attention for the subject of M&A, instead of rushing to catch planes. The resulting increase in corporate M&A activity accounted for nearly 75% of the value of all large companies that changed hands globally in 2021.

But PE companies are not far behind. Over the course of the year, they continued their ferocious climb, raising the value of the PE business by 98% to $1.5 trillion – a figure that seemed impossible not long ago. Buoyed by the successful “buy and build” acquisitions that have become increasingly common in this space, PE companies were not only prodigious buyers, but also confident ones, driving the average value of PE deals by 44%, for US $1.3 billion.

PE firms were not the only big traders. With all the changes in the global economy and consumer behavior, many companies have continued their single-minded pursuit of digital transformation, which has helped secure the technology, media and telecoms (TMT) industry’s position as a giant in the mergers and acquisitions industry.

TMT increased its share of global M&A activity to 34% of deal value from 30% the year before – and was responsible for the year’s top six deals (led by Discovery-Warner Media, valued at more than US$ 96 billion – more than double the next biggest deal). In claiming this ground, TMT continued an almost constant five-year climb that allowed it to eclipse the next five largest M&A sectors (real estate, followed by manufacturing, energy, healthcare and financial services). None of these sectors accounted for more than 11% of the global market in 2021.

Says Oliver Engert, global co-lead of McKinsey’s M&A Practice, “M&A had an absolutely amazing year in 2021. We broke all previous records. The huge constriction of the markets in 2020 led to a lot of pent-up demand, which was released in the third and fourth quarters and extended into 2021. Also, with the COVID-19 pandemic, corporations began to rigorously review their assets. Some needed to raise money quickly. Others took the opportunity to clean up their properties. This led to a rich pool of assets becoming available just when many companies had strong balance sheets, cash flows and earning potential – and needed to buy.”

Adds Andy West, global co-lead of McKinsey’s M&A Practice, “What surprised me most about trading in 2021 was just the volume. When people are unsure – about valuations, the economy or industry performance – they tend to hit the brakes. We certainly saw some of that in early 2020. But the recovery has been shocking.”

Also supporting M&A activity in 2021 was an arguably more accommodative regulatory climate than the current context, along with stimulus infusions, favorable interest rates, more advantageous tax environments and rising commodity prices, as well as support from investors from PE and some SPAC money, says Oliver. PE firms have become formidable players in the merger and acquisition cycle not only because of their deep pockets and finite investment horizons, but also their ability to decouple themselves from quarterly earnings demands – allowing greater freedom to restructure holdings. to reach new frontiers of performance. “We’ve seen some wonderful financial returns coming out of these companies. This positive track record only fuels more activity.”

The prospects for 2022 have become a little more complicated. But we will have to wait longer to see.

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