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By Hamish Armstrong (Senior Communications Officer), Published

After a record-breaking 2021 for Merger & Acquisition (M&A) activity, experts from the Mergers and Acquisitions Research Centre (MARC) at Bayes Business School (formerly Cass) outline their predictions for the next 12 months.

1. An increased emphasis on diversity

Gender, ethnic and cultural diversity is becoming an increasingly important consideration for many companies, according to Dr Valeriya Vitkova, Research Fellow at Bayes, who expects this to become an even higher strategic priority.

“Issues relating to diversity and inclusion are becoming more and more relevant in every stage of the M&A process, particularly for due diligence and integration,” Dr Vitkova said.

“Research shows that companies with greater diversity and inclusion perform better than their competitors. This includes our recent study in collaboration with SS&C Intralinks that showed M&A deals initiated by more gender-diverse boards are perceived more positively by the market and lead to higher share price and operating performance in the long run.

“Important factors that will drive deal-making from an acquirer’s perspective will, now more than ever, include assessing the target firm’s diversity and inclusion performance, making sure post-deal integration incorporates these into the new objectives, and having effective communication with both target and acquiring firms on all issues relating to diversity and inclusion.

“Executives who are able to ingrain this into their M&A strategy and make sure their own deal-making teams are diverse are likely to significantly increase their chances of experiencing superior post-M&A performance, compared with competitors.”

2. ESG objectives to drive deal activity

Alongside diversity, the Environmental, Social and Governance (ESG) agenda has gathered pace in recent years. Dr Zhenyi Huang, Research Fellow at Bayes, expects to see this continue in the year ahead, with more deals being completed and aborted based on value compatibility.

“As the ESG agenda becomes one of the top management objectives for global businesses, it is forecast to drive greater deal activity in future,” Dr Huang said.

“Our recent research shows that firms benefit from ESG capability transfer through deal integration, and acquiring these capabilities is becoming an increasingly significant deal driver.

“There are also more financial sponsors with ESG specific focus than ever before, with greater funds becoming active to support deals in this area. For example, many debt providers are offering better pricing to acquirers that are involved in ESG-related deals.

“Furthermore, with improvement in firms’ ESG disclosure under much tightened regulatory and market pressures, I expect deal makers to include greater ESG due diligence as part of their transactions to reduce potential risks involved in a deal.”

3. Fear of interest rate rises and inflation to drive quicker debt-funded deals

The pandemic and rising costs of living have driven inflation, with inevitable increases to interest rates. Professor Scott Moeller, Director of MARC and Professor in the Practice of Finance at Bayes expects this to fuel greater urgency to get deals done sooner rather than later.

“Interest rates are forecast to rise in the year ahead, having reached record lows at the start of the pandemic,” Professor Moeller said.

“In fact, we have recently seen the Bank of England raise rates in the UK for the first time since March 2020.

“Because many M&A deals are funded with debt, a lot of potential acquirers will be desperately trying to get deals completed now before the funding window becomes more expensive and it ends up costing them more than they had anticipated.”

4. Record year for IPOs to lead to further acquisition activity

2021 was a record year for global M&A activity, but also for initial public offerings (IPOs) and corporate fundraising. Professor Moeller said this created yet greater capacity for deals.

“Some of our recent research has shown that acquisitions are the single most likely corporate event to take place following an IPO or significant round of fundraising,” he said.

“Typically, this can take as little as nine months, so last year’s additions to corporate coffers provides a strong war chest for more deal activity.”

5. Private equity firms to convert record cash reserves into even more deals

Similarly, the very high levels of cash currently being held by private equity firms are expected to increase the volume and value of deals.

“Private equity firms have record levels of cash,” Professor Moeller added.

“This, combined with funds raised by special purpose acquisition companies (SPACs) and easier listing requirements in certain countries, will make more external money available for investment and targeting deals.”

6. An increase of digitisation in deal-making

Uncertainty around the pandemic will create a need for greater digitisation and use of technology around deal-making, according to Dr Naaguesh Appadu, Research Fellow at Bayes.

“With Covid lurking, we can expect to see a surge in digital transformation deals and for firms to provide funds to restructure and adapt to changes in the market,” Dr Appadu said.

“Businesses had already been focusing on this area within their operations pre-pandemic, but restrictions on travel and workplace interactions over the last two years has seen this accelerate drastically.

“Organisations have had to change focus because of circumstances, with new skills demanded of a scarce labour market. These skills include software engineering, data mining and cyber security.”

7. A shift in power away from China

Along with the belief that 2022 will once again break records for deal activity, there are expected caveats. Professor Moeller believes less involvement from China could somewhat temper deal acceleration.

“Even though I expect to see more records broken in 2022 for the volume and value of deals, we need to treat this with some caution,” Professor Moeller said.

“Increased protectionism at a political and local level may impact deals between different markets. Furthermore, China's continued inward focus and reduction on overseas investments since the start of the pandemic, plus additional regulatory scrutiny of deals beyond the protectionist front, could have a knock-on effect to the rest of the world. Alternatively, though, it could open the door for other markets to thrive – including Japan, India and South East Asia.

“Data from our recent research with Willis Towers Watson suggests a robustness to the M&A market in spite of China’s lower activity in 2021.”

Find out more about the Mergers & Acquisitions Research Centre.