PwC report: record 2021 M&A deals to continue
Corporate mergers and acquisitions reached unprecedented levels in 2021, and a just-released PwC report forecasts that 2022 will be more of the same.
The PwC report: Global M&A Industry Trends: 2022 Outlook said that a pent-up dealmaking desire left over from 2020 was unleashed last year with the demand for technology, and for digital and data-driven assets fuelling the often-frenzied M&A activity in 2021.
That activity decisively broke records. 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, smashing the previous record of $4.2 trillion set in 2007. It included 130 megadeals each valued at greater than $5 billion. That’s nearly 60 per cent higher than in 2020.
But PwC sees the potential for distressed assets from banking and insurance sectors to produce a wave of deals in 2022. It sees private equity firms and asset managers continuing their push into the insurance sector, specifically in life insurance and annuities.
Global M&A Industry Trends: 2022 Outlook examines current global deals activity and incorporates insights from PwC’s deals industry specialists to identify the key trends driving M&A volumes and valuation multiples.
In the financial services sector, the report highlights how competition for strategic market advantage continues to fuel M&A, with activity led by deals for technology and innovation. Asset and wealth managers are looking to expand into new asset classes, banks are being pushed to modernise by implementing new digital solutions, and insurance companies are looking for opportunities to divest non-core assets or refocus core competencies.
Analysts say that while activity is still largely defined by the consolidation of a highly fragmented industry, new business models are emerging in sub-sectors, especially among fintechs, insurtechs and regtechs.
They say that although targets in these sub-sectors are often highly attractive opportunities, high multiples raise the stakes for investors, who increasingly need to adopt a value-creation mindset to maximise their return on investment.
James Ferris, partner and advisory leader, PwC Bermuda, said: “An attractive market, with many potential investors is continuing to lead to divestiture activity, along with capability-driven deals as organisations seek to leverage technology, buy into niche markets and drive business efficiencies.
“Optimising capital structures will result in further deal activity in the insurance and reinsurance sectors.”
While deal-making will likely remain robust in 2022, headwinds from higher interest rates, rising inflation, increased taxes and greater regulation could pose structural or financial hurdles for completing deals in 2022.
Damian Cooper, PwC Bermuda partner, insurance, pointed out: “In the global insurance and reinsurance market, record levels of deployable capital and continued investor interest in insurance carriers and distributors are boosting M&A activity, especially in the US market.
“We expect private equity firms and asset managers will continue their push into the insurance sector, specifically in the life insurance and annuity space, as large insurance carriers seek to divest non-core assets.”
PwC states that increased interest in acquisitions from mutual insurers reflects the desire to acquire blocks of business, as they seek to grow and offer new products.
It says: “Ongoing brokerage consolidation is expected to continue apace. Several specialised PE players are focusing on the insurance brokerage sector, using a roll-up strategy to gain scale.
“Enthusiasm for insurtech IPOs has recently waned due to lower post-IPO performance. While operating profits may have fallen short of expectations which their market cap created, the underlying technology and data-collection opportunities remain attractive.
“As such, we expect overall investor interest in the insurtech space to remain high, both from PE investors and corporates that are looking to bolster their technology and client offerings.”
The report states: “Private equity is flexing its fundraising power and increasing its market share of deals activity PE continues to capture more, and larger, deals.
“Almost 40 per cent of deals in 2021 involved a PE fund, up from just over a quarter for the past five years, and PE firms are doing bigger deals, accounting for 45 per cent of total deal value in 2021, compared to 30 per cent over the past five years.
“Heading into 2022, PE has ramped up its deal capacity, raising record levels of ‘dry powder’ capital. Portfolio reviews are driving divestiture and acquisition activity across industries.
“On the corporate side, we expect the strategic shift to digital, innovative and new disruptive business models to continue to drive M&A decision-making. With market conditions that demand a greater value creation mindset across global boardrooms, CEOs will also likely focus on divestitures, as they rebalance their portfolios for longer term growth and profitability.
“Environmental, social and governance (ESG) factors will also increasingly influence M&A strategies throughout 2022.
These trends are playing out across other key industries:
● Consumer markets: Consumer preferences will continue to serve as a catalyst for M&A activity in 2022 as corporates and PE remake their portfolios to capitalise on trends such as ‘conscious consumerism’ which are creating demand for new products and services and entirely new business models.
● Energy, utilities and resources ESG is driving strategies across the industry. M&A will be used to rebalance portfolios and pursue value creation opportunities in ESG growth areas such as renewables, carbon capture, battery storage, hydrogen, transmission infrastructure and other clean technologies.
● Health industries: Pharma companies are seeking to optimise their portfolios for growth through deals that provide access to new technologies such as mRNA and cell and gene therapy. In healthcare services, speciality care platforms, telehealth, healthtech and data and analytics companies are attracting investor interest.
● Industrial manufacturing and automotive: Strategic portfolio reviews and ESG are driving M&A activity – in particular, deals that accelerate digital transformation such as electric and autonomous vehicles, batteries and charging technologies, additive manufacturing, next-generation materials, and production with non-fossil energy sources.
● Technology, media and telecommunications: As traditional industries face high levels of disruption and innovative technologies propel into the mainstream faster than anticipated, the technology sector will continue to see unmatched levels of deals activity – and deal values – as companies from across all industries seek to acquire key technology or digital capabilities.