Key takeaway: The long-term factors driving historic levels of global M&A remain firmly in place. While KPMG professionals remain optimistic that 2022 will see similar levels, there are some factors to consider.

Right now, by about every measure, deals are at a historic high globally. Superlatives abound. The question that remains, however, is how sustainable is it all?

There has now been six straight quarters where global deal value totaled more than US$1 trillion in each of those quarters. It only took the deal market three quarters in 2021 to reach what normally took a full year in the last decade. Looking back over 2021, the total deal value is up a staggering 59 percent while deal volumes are up 22 percent from 2020. Even if you move the baseline to pre-pandemic levels, they are still up 47% and 22%, respectively between 2021 and 2019.

2021 Year End - Annual global deal volume and value

Are trillion-dollar quarters a new normal?

What are the forces driving deals? How relevant are they going to be in 2022?

To determine if this deal activity will continue, one should first look into the broader underlying trends that have pushed activity to this level in the first place. Then, review the factors that could impact the level of deal activity in 2022. Let’s begin by reviewing the sentiment of global CEOs.

2020-2021 Quarterly global deal volume and value

CEO perspectives

KPMG International’s Global CEO Outlook from July 2021 saw a dramatic shift in CEOs’ attitudes toward M&A. A vast majority (87 percent) of CEOs expressed a moderate or high appetite for M&A over the next three years. Those expressing a high appetite more than doubled (from 18 percent to 50 percent), the highest  seen since this survey was started1. Similarly, those expressing a low interest in deals now only represented a minority of CEOs, dropping to 10 percent.

This shift in appetite has caused one to wonder: did the reprieve from global COVID-19 cases in the months following July 2021 act as a wake-up call for business leaders? Six months later, there is arise in deal market results.

CEOs expressing a moderate or high appetite for M&A over the next 3 years

Did the emergence from pandemic act as a wake-up call?

Total of moderate and high has returned to pre-pandemic norm (84-87 per cent), however those indicating a high appetite has exploded, accounting for half of all CEOs surveyed.

  • M&A appetite was 10 per cent high in companies with increased or decreased revenue, versus those with flat revenue reported. (2021 vs 2020 revenue)
  • High earnings outlook has a measurable impact on their appetite for M&A

Transformations can drive deals

As you track the journey from before the pandemic to where we are today, the most consistent trend we see is the need for digital and business transformation. If anything, this need is only escalating and accelerating with the twin threats of an abating pandemic and ever-looming environmental concerns. The scale of change can only be described as generational, which impacts the timeline of investments.

Businesses have been focused on transforming their operations over the past several years, however, the pandemic has accelerated the speed and escalated the scale of change. Surveyed CEOs see deals as a keyway to achieve their goals faster.

Digitization and automation of the workforce were in place pre-pandemic, but it is now a larger driver of deal activity. During the early stages of the pandemic, almost every business faced significant and unprecedented shocks, and most companies responded by fast-tracking technology deployments— in some cases, accelerating years’ worth of digital transformation worked in a matter of months. Social distancing has boosted demand for automation, robotics, direct-to-consumer offerings and remote-working technologies.

The consumer and retail sector provides a good example of this movement over the last two years. Global retail ecommerce grew by an astounding 26 percent  in 2020, with direct-to-consumer (D2C) ecommerce driving much of that growth as D2C channels reported growth of 45 percent. Powered by deal-making, JVs, alliances and internal transformations, manufacturers have made substantial gains in lowering cost. A future piece on DTC will likely provide further insights.

“Organizations in the technology sub-sector are putting in place ambitious goals to capitalize on the opportunities the pandemic has created.” A report from Source Global Research on the TMT sector in EMEIA shares that, “M&A is high on their agenda, but it’s not all about growth, with transformation well under way around workforces to improve efficiency in addition to continuing digital investment. Technology organizations are also keen to respond to the ESG agenda as a key priority.”

Regardless of the ongoing nature of the pandemic itself, its clear pandemic has lit a second jet engine on technological change. The pace of deal making is expected to remain elevated, even if shifts such as ESG shifts the market’s focus.

What's more, the environmental, social, governance (ESG) agenda  that started to come into the consciousness of CEOs in 2019 is now very top of mind. This is likely to generate additional deal activity as organizations look at their ecological footprint, and consider purchasing, rationalizing or divesting assets. Moving forward, investors are likely to see ESG as a critical element to build a more sustainable business that can better adapt to potential market shifts.

Immediate outlook

What factor and indicators could impact the deal market?

While the long-term view seems clear (more transformations, more deals) and calls for a heightened volume of deal-making, the short-term outlook is less clear.

According to the analysis of the CEO Outlook, rapid reversions of M&A appetite are possible in the short-term. Looking back to April 2020, I don’t think anyone could have predicted April 2021. So, it is difficult to be sure what April 2022 will bring. Here are some factors that should continue to be assessed.

1. Economic trends

What could moderate this record-breaking pace? The usual suspects: interest rates, supply chain, talent, inflation and growth concerns. Furthermore, not all recoveries are created equal. The Chief Economist at KPMG in the US, Constance Hunter, believes a K-shaped economic recovery is forming, where different parts of the economy are recovering from the pandemic at different rates and magnitudes. Already, there are signs of this across the economy — with a strong bifurcation between different industries, geographies and households.

This split is expected to drive deal strategies going forward, as those in stronger positions may be able to accumulate the necessary assets and capital to purchase those in more distressed positions. Less desirable assets could see distressed sales at lower valuations, particularly assets in sectors more adversely impacted by the pandemic or with business models that are no longer viable given the structural changes taking place.

With relatively low interest rates continuing, and private equity firms’ war chests growing, it appears that this year’s strong deals market may continue.

One particular factor is being heavily discussed among investors: inflation, which is currently at record levels. While the longevity of inflation is debated, national banks are being forced to raise interest rates, which should, in turn, cause M&A activity to eventually cool down.

Yet, several arguments point into the opposite direction. Firstly, while the inflation impact varies across industries, it generally puts market-leading companies into a much better position to roll over higher prices to their customers, thus further accelerating consolidation and transformation of industries. Secondly, the impact of rising interest rates may not necessarily provide downward pressure, as expectations of rate hikes may accelerate as buyers move up plans to lock in lower rates. When you examine a similar period of rate increases between 2016 and 2019, you do not see M&A decreasing, rather, it increases in both deal volume and value over the same period.

2. The US M&A engine

The US is a massive driver of global deal activity. More than half (58 percent) of total global deal value involved a US buyer or target. If you just look at the 100 largest deals, this impact is even more pronounced – over two-thirds involved a US-based company (either as a bidder, a target or both). This has translated into US involvement in a staggering US$3.2 trillion out of US$5.7 trillion of global deal value deal value in 2021, or a sum greater than the entire M&A market just 10 years ago.

Comparing Global and US deal value over 10 years
US cross-border deal volumes (%)

This influence is also seen in global cross-border deal volume. In 2021, the US passed the US$1 trillion mark for total cross-border deal value for the first time, a staggering 132 percent increase from 2020, and nearly US$400 million higher than the previous peak in 2015. Similarly, US cross-border deal volumes are also up 44 percent from 2020 and now accounts for 34 percent of all cross-border deals in 2021 (6,732 US cross-border deals out of 19,559 total global cross-border deals).

The proportion of cross-border US deal activity, as a percentage of its total deal volume, has been growing over the last 10 years, averaging about 30 percent between 2010 and 2017 and increasing to 32.7 percent between 2019 and 2020 before hitting a peak in 2021 at 34.18 percent. 

Given the dominance of the US in deal-making, the results of a recent KPMG survey bode well for the global market. KPMG in the US surveyed 350 U.S. executives in November–December 2021 and expect 2022 could be even bigger than 2021.

3. Stock market and the deal market

Both the stock market and the deal market ended 2021 at historic highs. However, if you look at average deal value, it is quite a different story. Average deal value looks at the total value and total number of deals where the value was disclosed as a significant number of deals do not disclose their deal value.

Since 2016, the global average deal value has hovered around US$168 million. While the average deal size of US$174.61 million in 2021 (Q1 to Q3) is somewhat higher than average, it is still well below the 2015 peak of US$228 million. At the end of 2015, the S&P ended at 2,044 and US GDP was US$18.2 trillion.

If you accept that the S&P500 or US GDP are proxies for the total value of its economic assets, it might stand that within this context, there appears to be some room for increased deal value.

Comparing 10 year trendlines | KPMG Deal Advisory

Confidence in value creation required

Creating value from a deal is the essential challenge of today’s environment. Many factors have disrupted the traditional M&A playbook. Business owners may need to consider their value creation strategies as dealmakers take a more proactive — and even more aggressive — approach to acquire the assets they want. A prior article, shared the need to have the necessary capabilities and technology investments to move at deal speed:

Four considerations for creating deal value

Assess value creation

Value creation detects, quantifies and realizes performance improvement in a business. Speed is of the essence as is the need to deliver risk and value-focused analysis with a sector-specific lens.

Look beyond financials

Buying into a highly competitive deal environment requires an equally high level of confidence in meeting investment objectives. With the days of financial engineering and high tax shields behind us, performance improvement becomes key.

Face sector-specific pricing challenges

Understand the nuances of certain sectors to help bridge the gap between price and value to compete in a hot market. It’s also important to understand where incremental value could be generated. Critical insights are often deeply hidden in sector signals and transaction-level data often missed by current approaches to strategy and analysis.

Bring visibility to ESG

Increasingly, investors, consumers and other stakeholders are evaluating performance through an ESG lens. Whether preparing to transform, buy or sell, ESG due diligence can help assess the value and the risk. Deal financing may be harder to find for ESG-unfriendly investments.

The transformation of industries is continuing at a rapid pace. The current pandemic was the accelerant to a process clearly underway pre-2020. At some point, we hope to look back at the pandemic in the rear-view mirror and see that the digital leap foward coupled with the crystallisation of environmental, social and governance concerns was one of the lasting legacies of our time. Having a clear definition of value in this broader context, and how to secure it in the deal environment are expected to continue to play a vital role in achieving these goals.

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1 Source: All data, unless noted is sourced from Refinitiv, as of January 3, 2022 with further KPMG International analysis.