Record pace of M&A expected to continue

Outlook for 2022 stays bullish across the board despite key obstacles.
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A national survey conducted by a Michigan law firm found nothing is expected to break the stride of M&A dealmakers over the year to come.

In September, national law firm Dykema Gossett distributed its M&A Outlook Survey via email to a group of CEOs, CFOs and other senior company officers and executives, as well as professional advisers engaged in the M&A industry. The 266 survey respondents represent a cross-section of executives and M&A advisers engaged in the technology, media, financial services, industrial/manufacturing, real estate and construction, health care, energy, automotive and education sectors. Respondents represent companies with annual revenues from less than $1 million to more than $1 billion.

Responses to Dykema’s 17th annual Mergers & Acquisitions Outlook Survey indicated M&A is expected to be strong in the next 12 months, with most viewing the Biden administration’s legislative agenda as positively impacting activity.

Seventy-five percent of respondents expect the U.S. M&A market will strengthen in the next 12 months, while only 7% anticipate it will weaken. Respondents not only predict deal volumes will be up across the board, from small to midmarket to megadeals of $1 billion and more, but nine out of 10 also expect M&A activity among privately owned businesses to increase over the next year.

Tom Vaughn. Courtesy Dykema Gossett

“For us, the optimism comes as no surprise,” said Tom Vaughn, co-leader of Dykema’s mergers and acquisitions practice. “The top three factors cited as fueling current M&A activity — availability of capital, financial markets and general economic conditions — support the notion that all the fundamentals needed for a bull market are there. All of this coincides with recent data showing this year’s M&A activity is on pace to be the biggest in history.”

Vaughn said the flood of new startup private equity firms in the market looking to make strong returns — including in Michigan’s middle market — contributes to the availability of capital for those looking to buy.

In addition to strong financial markets, he said the current high business valuations are drawing sellers to market who otherwise may have continued to sit on the sidelines.

When asked about leading concerns regarding M&A in the next year, respondents said the pandemic still ranks as a top challenge, with 49% citing it as a significant obstacle to M&A in the next 12 months. The fact that the survey was conducted before the omicron variant appeared and began spreading probably makes this an even bigger concern today, Vaughn said.

“This (concern about the pandemic) might stem from ongoing supply chain and labor shortage issues associated with the pandemic, as well as the general, but persistent, uncertainty it brings,” said Jeff Gifford, leader of Dykema’s corporate finance practice group. “That said, now, even after the surge in cases, dealmakers have learned how to manage COVID-19-related uncertainties, with respondents ranking COVID-19-related delays sixth in order of the most common obstacles they experienced in deal-making last year.”

Vaughn added the M&A world quickly adapted to doing due diligence and management meetings virtually, which allowed them to carry on advising and closing transactions at record rates in 2021.

In a departure from Dykema’s 2020 M&A Outlook Survey, most respondents believe the implementation of Biden’s policies — including his proposed infrastructure bill, immigration reform, renewable energy targets and increased deficit spending on economic stimulus — will have a positive impact on the U.S. M&A market in 2022.

Respondents do not believe issues such as heightened antitrust scrutiny and corporate tax increases, generally considered hostile to the M&A market, can slow down the U.S. M&A market in the next year, likely due to gridlock in Congress making those reforms unlikely to pass anytime soon, Vaughn said.

The survey yielded several additional findings:

  • Sixty-five percent of respondents said they were more likely to be involved in joint ventures — the biggest increase over 2020 (14%) out of the three deal types surveyed (acquisition, sale, joint venture) — though all categories saw reasonable gains.
  • Respondents embraced an increase in the Securities and Exchange Commission’s scrutiny of special purpose acquisition company (SPAC) initial public offerings (IPOs) in the near term (58%) and long term (67%) and expect the SPAC boom to continue.
  • Most respondents (55%) have worked on a deal in which the target company or buyer was screened for environmental, social and governance (ESG) risk within the past 12 months, while three-quarters of respondents expect to work on a deal that includes screening for ESG risk over the next 12 months.
  • Technology and health care, both prominent economic players in 2020, dropped down to fourth and fifth places when asked what sectors were expected to be the most active in the next year, while energy soared from eighth to second place. For the fourth year in a row, the automotive industry topped the list.

Vaughn said Dykema, being Michigan-based with an office in Grand Rapids, segments the data from respondents based in the region to see if there are any appreciable differences in the M&A outlook for Michigan vs. the national outlook, but this time around, nothing stood out.

If anything, he said, Michigan is benefiting from the ongoing top position of the automotive industry when it comes to M&A activity, as well as the surge of deals in the energy sector — including solar, where tax credits are available for companies focused on renewable energy — and electric vehicles (EV), as the state’s major automakers race to compete in the EV space.

“That is going to transform the industry, and the large companies are going to need to do acquisitions of companies that are particularly focused in on the EV world,” Vaughn said.

For companies looking to do M&A in 2022, Vaughn said his advice is to start early.

“There is going to be a lot of overflow from the deals that did not get done (in 2021) into (2022). I already have a couple deals that I’ve pushed into (this) year, and as a result, I think 2022 is going to be very busy,” he said. “You don’t want to be in the position (of waiting to sell until) next fall. You want to do it sooner so that you can make sure that your deal gets enough attention.”

The best thing sellers and buyers alike can do, he said, is to be well prepared — financially, organizationally and legally — to start the deal process before it begins.

“You want to have all of your ducks in a row so that when you hit the street and you hit the investment banking process, things can move very quickly, and you can garner the highest valuations,” he said.

Dykema’s full 2022 M&A Outlook Survey Report is available at bit.ly/dykemaMAoutlook.

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