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20 May, 2022 - 22:00

The deal is just the beginning

Global mergers and acquisitions (M & A) hit new highs in 2021 – breaking prior records by a long shot, writes Stephen Hart, East Deals Leader, PwC Cambridge .The number of announced deals exceeded 62,000 globally in 2021, up an unprecedented 24 per cent from 2020. 

Publicly disclosed deal values reached all-time highs of $5.1 trillion – including 130 megadeals with a deal value greater than $5 billion – a whopping 57 per cent higher than in 2020 and smashing the previous record of $4.2 trillion set in 2007.

The often-frenzied M & A activity in 2021 was fuelled by intense demand for technology, for digital and data-driven assets in particular, and the pent-up deal-making demand from 2020 that was unleashed. 

This has been exemplified in the Cambridge cluster with a significant trend of rising deal sizes from Series A valuations upwards. 

Whilst we don’t expect these records to be smashed in 2022, all the indications point to another supercharged year. Economic optimism remains generally high, there’s a strong deals pipeline, capital is in abundance, and companies across all industries badly need technology. 

It is true that there are growing headwinds. The trifecta of low operating costs, lower regulation and taxes and ever lower interest rates have, over the past decade, helped companies achieve year-on-year earnings growth, pushed stock markets to seemingly endless record highs and generally spurred M & A. 

But now each of those pillars is facing pressure for the first time in a decade, due to the pandemic disrupting the status quo and increasing global instability, including the war in Ukraine. 

As a result, higher interest rates, rising inflation, increased taxes and greater regulation could introduce structural, financial hurdles or delays for deals in 2022. 

We are already seeing greater volatility in financial markets, further disruptions in the global supply chains and increased levels of fiscal debt, as shockwaves from the pandemic continue to play out globally.

As we’ve learnt during the recent period, dealmakers should stay alert to how the new accelerated pace of change can bring these factors – or others – into play earlier and with greater impact.

The robust SPAC IPO (initial public offering) market in late 2020 and early 2021, combined with a resurgence in SPAC IPOs in late 2021, means that there remain almost 500 SPACs yet to announce a merger that will need to close a deal by late 2022 or early 2023.

As such we expect SPACs will continue to play a significant role in M & A in 2022 as they continue to compete against corporates and PEs for sought-after assets.

Creating value from the deal: Both defensive and opportunistic

However, shareholder returns are no longer the sole focus of a company’s value. Creating value in today’s market requires a broader, bolder perspective. Leaders who adapt stand to not just guard against future shocks, but take advantage of the opportunities on offer.

The increased need for resilience since COVID-19 has captured the attention of capital markets – in turn creating new imperatives for leaders seeking to build enterprise value.

A resilient organisation that can respond quickly to external shocks, flex to take advantage of new opportunities and include its broader societal impact in decision-making, is the new gold standard.

With so many variables, it’s important to tailor the ‘Value Creation’ approach to each business and its circumstances, requiring a creative, collaborative approach to finding the right answer. It’s also vital to include the flexibility to adjust if conditions change.

Disruption will continue for some time yet, bringing further shocks and opportunities. Those businesses that act now to improve their value will be best placed to respond to whatever is coming next.

Whether you are seeking to cut costs, maximise the potential of your people, reinvent your business model or break into new markets, start with a ‘Value Creation’ mindset – the deal is just the beginning.

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