Bain & Company’s fourth global M&A report shows 89% of M&A executives expect deal activity to stay the same or increase in 2022. The highest M&A deal value took place in 2021.
BOSTON, Feb. 8, 2022 – In 2021, corporate dealmakers raced to acquire transformative capabilities and scale rapidly amid soaring valuations. This led to a record-breaking year for M&A deal values, exceeding expectations at an unmatched $5.9 trillion. These are among the findings of Bain & Company’s fourth annual M&A report.
Valuation multiples reached an all-time high of 15.4 times enterprise value/EBITDA in a hot market. With multiples of 25 times, technology assets diverged from the broader M&A market. Similarly, asset prices in the healthcare industry have soared, with median multiples of 20 times.
Despite the high costs, fresh research predicts that deal activity in 2022 will be positive. According to Bain’s global study of over 280 executives, 89 percent believe their own transaction activity will remain the same or increase this year. The deal-making climate is fundamentally appealing, and a well-balanced mix of market signals indicates that the strategic M&A market will stay robust.
While corporate-led deals grew by 47% in 2021, deals involving financial investors, special purpose acquisition companies (SPACs), and venture capital (VC) firms grew by over 100%.
“This isn’t your parents’ M&A market,” said David Harding, Bain & Company advisory partner. “If you peer beneath the headlines, the modern-day story of M&A becomes significantly more complicated. Dealmakers are grappling with increasing multiples and a growing diversity of deal types, with alternative models such as partnerships increasing. We wrote this report to help executives sort out ways M&A can create value despite these complexities.”
The prospects afforded by the changing landscape of the M&A industry are explored in this new report. In M&A, doing a lot of things right is critical, especially when every asset is priced to perfection. What is the most important factor in determining whether or not a merger or acquisition will succeed? Experience. According to Bain’s analysis, frequent and material acquirers generate higher total shareholder returns (TSR) than those with a weaker M&A strategy.
“Companies are using M&A to keep pace with the trends transforming their industries, many of which were accelerated by Covid-19, while also navigating high prices and intense competition,” said Andrei Vorobyov, a partner in Bain & Company’s Mergers & Acquisitions practice. “While strategic buyers across industries are feeling the pain of record deal prices, they remain more affordable than public markets, which are trading at even higher multiples. Dealmakers that come out ahead in 2022 will be the ones that lean in, especially focused on the commercial opportunities brought by ESG, talent retention, and revenue synergies.”
The Bain report looks in-depth at three factors dealmaking executives must get right to thrive in this white-hot market: talent retention, ESG, and the changing regulatory environment. It also includes 15 industry-specific perspectives and four country-specific deep dives.
Talent retention: a critical factor to deal success
Talent retention, second only to having a strong transaction thesis, is cited by M&A practitioners as a primary driver of deal success. Employees may be concerned about uncertainty and change as a result of M&A at any moment, prompting them to examine other possibilities. This is especially true in today’s hot labor market, which necessitates a new focus on retention issues.
In the software industry, for example, more than 75% of executives believe that employee retention is more difficult now than it was three years ago. According to tech leaders, the main retention risks are uncertainty about one’s function in the future company and appealing labor market alternatives.
Successful talent retention requires companies to be proactive about talent in both diligence and integration, establishing a strong and compelling vision for the future that employees can mobilize behind.
Dealmakers are behind on ESG
Despite the fact that ESG is fast becoming a measure of business quality, only 11% of M&A executives say they often analyze ESG in the deal-making process. However, 65 percent of those polled want their company’s environmental, social, and governance (ESG) commitment to expand.
For example, 68 percent of CEOs in the consumer products business see ESG as a way to gain market share, improve their brand image, and cater to changing customer tastes. Energy transition deals accounted for around 20% of all deals worth more than $1 billion in the energy sector in 2021, and Bain expects more energy businesses to employ deals to green existing assets in the coming year.
ESG must be more than a checkbox item during the M&A process, and it can take several shapes in transactions: purchases can be “ESG-motivated” and based on an ESG thesis, or they can be “ESG-conscious,” pursuing mergers for other reasons but keeping an eye on the ESG factors. To be successful in this field, companies must integrate their overall ESG strategy to their M&A strategy, make sustainability an element of each deal thesis, and make ESG a factor in delivering deal value.
The changing regulatory environment
In the US, Western Europe, and China, a combination of increased antitrust enforcement and rising national security concerns are requiring executives to rethink the completion odds of many deals. The past year saw several high-profile deals abandoned due to government opposition, and this scrutiny is likely to increase next year.
2021 brought new geopolitical considerations, particularly with regards to China’s crackdown on large businesses. However, it remains a strategic market for growth despite its tightened regulations. Success in this market requires buyers to reassess their expectations, plan for longer approval times, prepare for extensive information disclosure requirements, and address antitrust and data security issues. Additionally, multinational corporations must treat their China business separately from the rest of the corporation, adding necessary China-specific operations when looking to acquire within the country.
- Tech: Tech M&A strategic deal value has increased an astounding 64% since 2016, reaching a total of nearly $708B in 2021 and accounting for ~19% of all strategic M&A. Major tech companies are buying dozens of small targets each year, many doing a deal every week or two, often with the goal of adding valuable capabilities that will improve their core business. Bain’s research shows 96% of big tech players’ M&A now goes to deals with less than $500 million in deal value. This frequent, small M&A strategy requires a distinct approach, where buyers must focus on talent, preserving the culture and the capability they are buying. Revenue synergies also become more critical, as the potential for cost synergies diminish with smaller capability deals.
- Healthcare: In 2021, strategic healthcare M&A saw a total deal value of $440 billion, a 44% increase from 2020, with all healthcare sectors returning to pre-pandemic levels. Looking ahead to 2022, Bain expects small- and mid-cap pharma companies to continue to play a significant role in the market, due to the rising importance of specialty drugs and biosimilars; a continued consolidation among healthcare provider systems, aimed at building scale and cost efficiency; and for medtech acquirers to go after deals that enhance category leadership positions.
- Consumer Products: Large, incumbent consumer goods companies are losing to the “insurgents” in the race to growth, and M&A is a critical lever for them to get back in the growth game. Small brand deals to recapture growth now account for 75% of M&A volume in consumer goods, up from less than 50% a decade ago. Bain’s research shows that consumer goods companies that are frequent acquirers outperform their peers, with twice the sales growth rate than the industry average.
- Retail: As retailers iterate on operating models to serve the growing demand for shorter delivery windows, many are finding M&A is the fastest way to develop the capabilities they need to stay competitive. Partnering with or acquiring quick-commerce companies provides incumbent retailers with agility, hyperlocal delivery strength, established driver networks and delivery logistics capabilities outside of their typical wheelhouse.
- Media & Entertainment: Media M&A has been dominated in recent years by single-channel scale deals, often focused on the shift to streaming. Leaders are beginning to use M&A to deepen engagement with customers by extending into new channels, such as video gaming, fitness and betting. This is led by the Asian market, where China’s WeChat blends social media, gaming, and retail experiences into a single platform. Bain anticipates this cross-channel development will continue to drive M&A activity looking forward.
- Telecommunications: M&A in the telecommunications industry rebounded dramatically in 2021, with deal value rising by 48%. Scale deals, such as in-country consolidation, accounted for the bulk of telecom M&A in 2021. Rather than pursuing traditional M&A, more telecos are turning to different types of joint ventures, providing synergies by consolidating networks while still allowing partners to maintain their independence at the retail level.
- Payments: The hottest business in payments is “buy now pay later” (BNPL), which now accounts for 5% of all ecommerce sales in the UK. In the US, it is expected to grow by up to 15 times over the next three years, representing a potential $1 trillion in transactions. Incumbent companies in payments are rushing to get in on the act: BNPL deals represented 50% of payments deal value last year. This was embodied by the megadeal of 2021: Square’s all-stock acquisition of BNPL company Afterpay for $29 billion.
- Banking: The banking industry is primed for heated M&A activity. In an era of persistent low interest rates and economic uncertainty, it has been challenging for banks to grow their revenue organically. This positions M&A as a particularly important lever for growth, which could account for 50% of revenue growth in banking in the years ahead, an increase from the already high 35% rate. As the M&A environment heats up, however, traditional banks are facing increasing competition from private equity firms, well-funded digital-native banks, and technology firms buying banks.
- Insurance: Deal activity in the insurance industry was guided by three major themes in 2021: an effort to buy new capabilities, to evolve distribution or to build scale. Consumer-oriented and data-focused capability acquisitions are a growing emphasis in the industry. Likewise, Covid-19 shifted the gameboard on the dynamics of distribution, leading to new strategies and evolved M&A approaches. As it grapples with continued changes, Bain expects the insurance industry will continue to see transformative deals in the years ahead.
- Automotive: Despite a global semiconductor chip shortage and other lingering effects of the Covid-19 pandemic, automotive M&A more than doubled in 2021. Looking ahead, Bain expects automotive M&A to return to a growth trajectory as disruptive changes such as electrification, digitization, and automation are requiring manufacturers to acquire newly critical capabilities on a faster timescale than feasible via organic growth.
Bain & Company is a global consultancy that helps the world’s most ambitious change-makers define the future.
SOURCE: Bain & Company