Part three: M&A headwinds in 2022
With historic levels of capital available to deploy and stagflation restricting organic growth, the time is right for organizations to leverage strategic M&A as a direct route to progress and securing the resilience of their supply chains.
In order to do this against the backdrop of today’s broader geopolitical context (which includes the ongoing effects of the pandemic, rising protectionism and the war in Ukraine), comprehensive due diligence is more crucial than ever in investigating the stability of a target’s value factors.
COVID-19
The dip in M&A activity at the beginning of 2020 is largely considered to be a blip triggered by COVID-19 uncertainty, with M&A activity rebounding quickly. However, dealmakers admit that the pandemic continues to impact global economies, supply chains and business strategies, and seven in ten business leaders believe the ongoing uncertainty of the COVID-19 pandemic (including its financial impact) is still a significant challenge to their organization’s M&A activity. This is felt most strongly among business leaders within the energy sector (74%).
“The pandemic seized our market for a few months and deal activity slumped for a short time, but activity will come roaring back. The fundamentals of M&A activity will remain largely the same, and there is actually more money available to spend in private equity.”
Kevin L. Freeman | Chief Counsel Securities & Transactions | Tenneco
Protectionism
M&A activity is happening in the context of an increasing number of protectionist policies, trade conflicts and merger controls, and two-thirds (66%) of business leaders believe the rise of protectionism is creating an unstable environment for M&A – rising to 70% in the energy sector. International measures are a major impediment to the speed and ease with which cross-border deals can manifest, with regulations negatively impacting the way foreign investment takes place and limiting the opportunity for organizations looking to acquire targets outside their own jurisdictions.
James Lindop, Partner: “Achieving foreign investment or national security approval is fundamental to M&A, and there is a heightened focus on foreign investment scrutiny with new regimes – especially in the UK – coming into play. We’re seeing many deals which, on the surface, seem unlikely to cause any problems. Nevertheless, they end up falling squarely within one of the 17 mandatory sectors in the National Security and Investment Act. As a result, a notification has to be made and clearance must be obtained before the deal can close.”
Protectionism is impacting M&A in many ways:
67% of business leaders believe that protectionist policies are reducing cross-border M&A activity due to increasing complexity.
67% of business leaders believe that protectionism is making exposure to growth markets harder.
67% of business leaders believe that protectionist policies are reducing cross-border M&A activity due to increasing complexity.
67% of business leaders believe that protectionism is making exposure to growth markets harder.
Policy and legislation are a significant challenge to M&A activity:
66% of business leaders are concerned about obtaining foreign direct investment due to enhanced regulation.
63% of business leaders are concerned about the post-Brexit economic and regulatory environment.
63% of business leaders are concerned about navigating a complex tax environment.
66% of business leaders are concerned about obtaining foreign direct investment due to enhanced regulation.
63% of business leaders are concerned about the post-Brexit economic and regulatory environment.
63% of business leaders are concerned about navigating a complex tax environment.
“Protectionism is certainly having an impact on deal timelines. For example, approvals for a multi-country deal are now taking much longer. We are also seeing these checks occurring more often, and there are even instances where organisations might not enter a certain market due to increased protectionism. I predict that we will see a larger number of joint ventures where a local or national majority owner will work with a minority stakeholder to adhere to local protectionism legislation.”
Kristiina Janhunen | Director | M&A and CSD Legal | Nokia
Ukraine crisis
The geopolitical landscape has been shaken dramatically in 2022 with the outbreak of the war in Ukraine. The subsequent uncertainty – including the war’s inflationary impact on supply chains and commodities – has made pricing M&A deals more challenging, causing dealmakers to pause and reflect on value.
Our supplementary research revealed that 67% of business leaders believe the conflict has reduced their organization’s investment in M&A activity. Almost two-thirds of business leaders agreed that M&A activity was already slowing in 2022 following a record 2021, and stated that the war in Ukraine has decelerated activity even further. Sixty-five percent of business leaders said that they are seeing deal timelines significantly increase due to the war in Ukraine.
Business leaders said that the war is impacting deals in multiple ways. Almost three-quarters (74%) said that the Ukraine crisis is influencing M&A activity due to the direct impact of sanctions on the target. Seventy-one percent of business leaders said it is affecting M&A activity due to the increasing systemic risk within their industry, and 71% agreed that it is having an impact due to the influence on their share price and stock market volatility reducing the capital available.
Antony Walsh, Partner: “The events taking place in Ukraine are a sobering reminder of the human element in business. It is no surprise that we are seeing the war having an impact on the M&A market, mainly because deals are often made or broken based on employee buy-in. It's natural that there has been caution amongst our clients resulting in deal timelines slipping. That said, geopolitical events tend to be digested quickly by the market as business leaders reassess and reposition. Brexit was an example of another big market shock that caused ripples immediately but smoothed out fairly quickly, and we predict the same for 2022 and beyond.”
How is the ongoing war in Ukraine having an impact on M&A activity?
Direct impact of the sanctions on the target
The impact of the conflict on my company's share price and stock market volatility reducing capital available
Increasing systematic risk within my industry
Increasing energy prices
The fall in global economic confidence reducing our appetite to invest in growth