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The big drivers for M&A for 2022
Environmental, social and governance (ESG) and stressed industries will continue to drive M&A over the course of 2022, according to new research from global law firm Norton Rose Fulbright.
Lauren Croft
Norton Rose Fulbright has released their Australian public M&A deal trends report 2021 Edition: Switch to living with the pandemic sparks M&A frenzy – which reveals a number of trends to look out for in 2022.
“It would seem 2021’s promise of an economic rebound and market stability after the uncertainty caused by the first wave of COVID-19 in 2020 motivated deal makers to resume buying. Australia’s record vaccination rates and low unemployment figures are just some of the many reasons to remain optimistic,” the report stated.
“Still, the recovery was and continues to be accompanied by labour and skills shortages, rising inflation and the threat of interest rate hikes. Added to these factors is the evolving Russia – Ukraine conflict, which has already seen markets drop to all-time lows in 18 months and may, at least in the short-term, see bidders wait for greater certainty before launching a bid.”
Deal making in 2021 surged in Australia with 58 deals at a total value of $131.2 billion, compared with 40 deals at $30.4 billion in 2020. Of those 58 deals, 18 were mega-deals announced at a value of over $1 billion, including two of the largest deals recorded in Australian M&A history: the Sydney Airport takeover at over $23.6 billion and the acquisition of Afterpay at $39 billion in shares.
The continued surge in M&A deals this year will also be fuelled by rising concerns about ESG issues and ongoing stress in travel, leisure and hospitality industries, said NRF corporate M&A partner Jeremy Wickens.
“We expected a boom was coming for M&A in 2021 but were surprised by the sheer volume and value of the deals announced. Low interest rates coupled with an abundance of cashed-up bidders created a competitive acquisition market and plenty of opportunities for deal-makers.
“For 2022, we expect more ESG-influenced transactions as corporates re-evaluate their ESG strategies. We may also see opportunistic players target stressed and distressed companies in undervalued industries like travel, leisure and hospitality.
“Of concern though are local and international headwinds that may dampen M&A activity, such as the prospect of rising interest rates, inflationary and supply chain pressures, and the ongoing disruption caused by the Russian invasion of Ukraine,” he said.
Furthermore, the report notes that investing in ESG targets as a key driver has become increasingly popular in the M&A market.
“With the introduction of tighter government regulations, increased investor interest and greater public scrutiny, sustainability is becoming a prominent feature in many corporate strategies. Companies with strong ESG practices have proven to generate larger financial returns and display greater resilience in the face of economic shock,” the report stated.
“Materially impacting a company’s valuation, targets should seize opportunities that align with this global shift in order [to] maximise its attractiveness to potential bidders. Furthermore, targets should expect to spend more time on ESG due diligence.”
Despite 2021 being the biggest year for public M&A in Australian history, the report revealed that the proportion of acquisitions by private equity investors continued to decline. It sat at 10 per cent for 2021, compared to 15 per cent in 2020 and 19 per cent in 2019.
However, private equity investors were big spenders. Four of the 10 largest deals announced in 2021 involved private equity bidders, particularly when acquiring Australian infrastructure in order to generate stable returns for members.
“We expect private equity parties, both local and international, to continue to be a big player in the Australian M&A market as they look to deploy their coffers,” the firm said.
“The same should apply to major superannuation funds looking to deploy their vast capital into infrastructure and other attractive assets.”
Among other 2021 trends, the report also showed that the technology sector also boosted M&A activity in 2021, with high demand from businesses seeking to leverage digital transformation. Recent price corrections for tech stocks in the past six months though could lead to acquisition activity over the course of 2022 if valuations continue to fall.
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Lauren Croft
Lauren is a journalist at Lawyers Weekly and graduated with a Bachelor of Journalism from Macleay College. Prior to joining Lawyers Weekly, she worked as a trade journalist for media and travel industry publications and Travel Weekly. Originally born in England, Lauren enjoys trying new bars and restaurants, attending music festivals and travelling. She is also a keen snowboarder and pre-pandemic, spent a season living in a French ski resort.
