Bankers Weigh What’s Next After Historic $5 Trillion M&A Record

Fueled by cheap money and a soaring stock market, companies struck deals to boost growth, acquire new capabilities or to simplify their corporate structures

Dealmakers expect the pace to remain strong next year.
By Michelle F. Davis
December 28, 2021 | 08:21 AM

Bloomberg — The biggest mergers and acquisition boom in history isn’t showing signs of slowing.

Companies announced a mammoth $5 trillion-plus of deals in 2021, according to data compiled by Bloomberg, eclipsing the previous annual record set in 2007 by almost $1 trillion thanks to wave after wave of transformational M&A right up until the holidays.

Fueled by cheap money and a soaring stock market, companies struck deals to boost growth, acquire new capabilities or to simplify their corporate structures. In fact, every working day this year, a company has set a new takeover record for itself, like Oracle Corp.’s $28.3 billion takeover of Cerner Corp., its biggest deal ever. In many cases, investors have cheered companies on for pursuing deals.

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“Boards, shareholders and management teams looked through volatility and the M&A market didn’t miss a beat for 12 months in 2021,” said Stephan Feldgoise, co-head of global M&A at Goldman Sachs Group Inc.

The year saw iconic companies like Johnson & Johnson and General Electric Co. announce corporate breakups, a bidding war for railroad Kansas City Southern that ended in a $31 billion acquisition by Canadian Pacific Railway Ltd. and the planned merger of AT&T Inc.’s media businesses with Discovery Inc.

Nearly two years into a global pandemic, dealmakers expect the pace to remain strong next year.

“Despite the fact that we’ve set a record for the M&A market I believe we’re capable of reaching greater heights if the CEO and board room confidence remain strong,” said Cary Kochman, global co-head of M&A at Citigroup Inc.

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Private Equity Spree

A major driver of the deal flow has been private equity firms, whose spending on acquisitions accounted for a record 24% of global transaction value this year, the data show. The $34 billion takeover of Medline Industries Inc. and the $17 billion acquisition of Athenahealth Inc. -- both by groups of financial sponsors -- stand out as the year’s largest and mark a return to the club deals that became less common after the financial crisis.

Buyout Bingedfd

Buyout firms, flush with more than $2 trillion of dry powder, will likely pursue even larger acquisitions in 2022, according to Eric Schiele, a corporate partner at law firm Kirkland & Ellis. “I don’t think that piece of the market is going anywhere,” he said, adding that sponsors generally have an advantage over strategics in the current tougher antitrust environment.

Elsewhere, increasingly popular special purpose acquisition companies, whose sole purpose is to buy another business, added billions to the dealmaking total. About a quarter of SPAC capital is set to expire at the end of 2022, according to estimates from JPMorgan Chase & Co., so the blank-check companies are likely to continue competing with other buyers to strike their own takeovers across a range of sectors next year even as the popularity of the vehicle has faltered, advisers say.

Undampened Enthusiasm

While risks to the record run seems to be growing with the spread of new Covid-19 variants, supply chain issues, the prospect of rising interest rates, inflation and a stricter antitrust environment, it’s doing little to dampen dealmakers’ enthusiasm.

“It feels today like there’s no change afoot for 2022,” said Adam Emmerich, a corporate partner at Wachtell, Lipton, Rosen & Katz. “You can see it in the equity markets, in the debt markets and in the conversations we’re having with company management teams and boards.”

Some advisers even say that the blockbuster deals of $50 billion or more that characterized past booms will finally make a more pronounced comeback in 2022.

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“If the stock market holds up and no major event impacts it, I think all sized deals, including very large deals, are eminently doable, " said Martha McGarry, co-head of Mayer Brown LLP’s M&A practice in the U.S.

Others say the vibe around antitrust enforcement might prevent that: “We think companies are going to be cautious about doing high-profile industry transforming transactions until there’s more clarity around the antitrust regulatory environment,” said Gary Posternack, global head of M&A at Barclays Plc. “We’re likely to continue to see a number of transactions in the $1 billion to $10 billion range versus the mega transactions that we saw in some prior years.”

Either way, companies have gotten more comfortable with deals.

Cross-Border Jump

By September, they had announced 30% more transactions for targets outside their borders than they did in all of last year, according to David Wah, head of global advisory at Credit Suisse Group AG. That includes this month’s announcement that Australian biotech CSL Ltd., whose advisers included Credit Suisse, agreed to acquire Swiss drugmaker Vifor Pharma AG for almost $12 billion.

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“We’re not observing anything that would cause us to expect the M&A market to collapse or come crashing down next year,” said Marco Caggiano, co-head of North America M&A at JPMorgan Chase & Co.

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We asked a dozen top advisers to reflect on the past year and share their predictions for what comes next. Here’s more of what they had to say:

Cary Kochman, global co-head of M&A at Citigroup Inc.: “I expect the bigger deal component of the market to increase in the coming year despite the conversations around enhanced regulatory scrutiny. With increased confidence and increased stability, and as M&A markets tend to develop, the bigger deals tend to emerge. The conversations we’re having point in that direction.”

Blair Effron, co-founder of Centerview Partners LLC: “I think 2022 will be strong but not as strong as 2021. I’d love to be wrong. I do think inflationary pressures will continue through the year and assume the Fed will act robustly. Interest rates over the year will back up enough to make transacting a little bit more expensive.”

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“I could see the size of deals increase if we do enough $10 billion to $25 billion deals and they’re well-received.”

Martha McGarry, co-head of Mayer Brown’s M&A practice in the U.S.: “Corporate operating performance has stayed very strong and I don’t see that changing at least for the first two quarters of next year. I know just talking to management teams that they have significant M&A agendas both on the buy-side and sell-side going into next year. There’s a lot they want to accomplish. That makes me very bullish.”

Stephan Feldgoise, co-head of global M&A at Goldman Sachs Group Inc.: “This is one of the first years where there hasn’t been a M&A hiatus at some point during the year. There are shortages of labor, of semiconductors, of other things that are causing some industries to struggle to deliver product but it’s not from a lack of demand. Companies are performing really well. I certainly do expect the $10 billion to $50 billion deals to continue.”

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David Wah, head of global advisory at Credit Suisse Group AG: “The rise in spinoffs is a reflection of the pace of M&A activity over the last 10 years where companies have accumulated significant assets, parts of which have developed to and scaled to be sufficient to create their own independent opportunity to unlock value for investors. In some cases, it also reflects lofty valuations, creating the opportunity for boards to optimize value through separation.”

Jim Langston, co-leader of the U.S. M&A group at Cleary Gottlieb Steen & Hamilton LLP: “Some companies are going to come off the sidelines. In this environment scale is everything so if other companies in the same sector are growing through M&A and transforming or optimizing their businesses and you’re not a participant then you risk getting left behind.

“For the most part people have figured out what the regulatory environment is going to look like and got comfortable that the sky really isn’t falling and deals are still getting done. Companies are more comfortable that the regulatory landscape, while it can be challenging, is still navigable. That could catalyze more mega deals next year.”

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Gary Posternack, global head of M&A at Barclays Plc: “We’ve been running flat-out for the past 18 months. We’re expecting the year to start off very busy, just as we’re finishing this year, but M&A bankers like being busy. It will be tough to match this year’s volume totals, with the SPAC component of the market in particular likely to be smaller next year.”

Eric Schiele, a corporate partner at Kirkland & Ellis: “In 2018 and 2019 a lot of the deal volume was driven by gigantic deals. We really haven’t seen that this year. Some of that is people getting used to a very different regulatory environment from the both SEC and FTC. People have been a little tentative about some of the larger deals. I expect as strategics become more and more comfortable with this regulatory environment, we’ll start to see some of the larger strategic deals come back. I think there’s probably pent-up demand for the regular way level of huge deal making.”

Tom Miles, co-head of Americas M&A at Morgan Stanley: “You had a valuation environment where boards and management teams and shareholders are willing to sell. They’ve been through Covid. They’re saying: if someone can pay me a premium at this time I’m willing to entertain that.”

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Marco Caggiano, co-head of North America M&A at JPMorgan Chase & Co.: “This is certainly the most active environment that we’ve seen and we don’t see any signs of it abating materially. We expect corporate clarity to continue to be a big driver. You can observe a P/E multiple premium in the S&P 500 over time for ‘pure play’ companies with only one reporting segment versus companies with more than one reporting segment. Strategics are trying to make it easier for investors to assign premium valuations to them and hoping that will translate into higher stock prices.”

Adam Emmerich, a corporate partner at Wachtell, Lipton, Rosen & Katz: “Everybody who’s been doing M&A for a while has been involved in cycles of boom and bust. People wonder, if everybody knows that things are going to come crashing down, then why aren’t they behaving more ‘sensibly’? The truth is that there will be a turn in M&A at some point, we just can’t say when. It certainly doesn’t feel like it’s going to be in the first quarter of 2022. And ultimately almost all reversals are cyclical.”