The global M&A market continued its spectacular climb in last year’s second half, outwitting observers who thought it nearly impossible to defy gravity for so long. The value of large deals1 increased 67 percent for the year, peaking at $5.9 trillion, as corporations, private equity (PE) firms, and special-purpose acquisition companies (SPACs) toasted nearly 11,000 large deals—up 37 percent from 2020.
Russia’s invasion of Ukraine has clearly shifted the mood, triggering not only a humanitarian and geopolitical crisis but also the kind of shock that has served as a caveat when experts tried to weigh how long the high levels of M&A might continue. While it is difficult to look around corners with any confidence facing this kind of uncertainty, we expect strategies that have supported dealmakers in other challenging markets will continue to outperform alternatives here.
But first, there is still much to learn from 2021.
According to our M&A Practice’s review of the global M&A market, dealmakers in the Americas closed the year as the most active traders, accounting for more than half of M&A deal value worldwide (52 percent), followed by Europe, the Middle East, and Africa (26 percent) and Asia−Pacific (22 percent). Corporations continued their pandemic-enhanced scrutiny of business portfolios, aided by corporate leaders who found new reserves of time and attention by dialing in to meetings, rather than racing for planes. The resulting increase in corporate M&A activity accounted for nearly 75 percent of the value of all large businesses changing hands globally in 2021.
But PE firms were not far behind. Through the year, they continued their fierce climb, pushing PE deal value up 98 percent, to $1.5 trillion—a number that would have seemed unfathomable not so long ago. Boosted by successful “buy and build” acquisitions that have become increasingly common in this space, PE firms were not only prodigious buyers but also confident ones, pushing the average value of PE deals up 44 percent, to $1.3 billion.
PE firms were not the only outsized dealmakers. With all the shifting gears in the global economy and consumer behavior, many companies continued their dogged pursuit of digital transformation, which helped secure the position of the technology, media, and telecommunications sector (TMT) as M&A’s industry behemoth.
TMT increased its share of global M&A activity to 34 percent of deal value from 30 percent a year earlier—and accounted for the six largest deals of the year (led by Discovery-Warner Media, valued at more than $96 billion—more than double the next largest deal). In claiming this terrain, TMT continued a nearly steady five-year climb that allowed it to far eclipse the next five largest sectors in M&A (real estate, followed by industry, energy, health care, and financial services). None of these sectors accounted for more than 11 percent of the global market in 2021.
Says Oliver Engert, global co-leader of McKinsey’s M&A Practice, “M&A had an absolutely astounding year in 2021. We broke all previous records. The massive constriction of markets in 2020 led to a lot of pent-up demand, which released in the third and fourth quarters and spilled right into 2021. Also, with the COVID-19 pandemic, corporations began to rigorously review their assets. Some needed to raise cash quickly. Others took the opportunity to clean up their holdings. That led to a rich set of assets becoming available just when many companies had strong balance sheets, cash flows, and earnings potential—and needed to buy.”
Adds Andy West, global co-leader of McKinsey’s M&A Practice, “What surprised me most about dealmaking in 2021 was just the sheer volume. When people are unsure—about valuations, the economy, or sector performance—they tend to pump the breaks. We certainly saw some of that in early 2020. But the rebound has been shocking.”
Also supporting 2021 M&A activity was a regulatory climate arguably more accommodating than the context today, along with stimulus infusions, favorable interest rates, more advantageous tax environments, and rising commodity prices, as well as support from PE investors and some SPAC money, Oliver says. PE firms have become formidable players in the M&A cycle not only due to deep pockets and finite investment horizons, but also because of their ability to disassociate from quarterly earnings requirements—allowing greater freedom to restructure holdings to reach new performance frontiers. “We’ve seen some wonderful financial returns coming out of these companies. That positive track record just feeds more activity.”
Net-net: the 2021 M&A market had plenty of sparks and a pile of tinder waiting to be lit.
The outlook for 2022 has become more complicated. Notwithstanding new, profound questions about geopolitical stability, headwinds and tailwinds established earlier remain powerful forces. Potential challenges include rising inflation, increased taxes, and greater regulatory scrutiny—in addition to geopolitical risks and increasing nationalism. Countering these challenges are well-established strategic shifts that support transactions. These include the corporate embrace of increasing digitization, supply chain and environmental upgrades, and a more hands-on approach to portfolio management.
So how can dealmakers confront this complex web of market forces?
“We know programmatic acquirers consistently deliver more value with less risk than any other approach to M&A,” Andy says. “This means consistently doing M&A over time at a level that is relevant enough to accelerate strategy (about two small to medium-sized deals a year accruing to a meaningful amount of market cap).
“The pandemic highlighted the importance of a through-cycle mindset toward M&A. Companies that continued to be programmatic outperformed. They were agile, nimble, and willing to invest behind strategy and its pivots via M&A. The last few years have been a validation of what we’ve learned from previous downturns.”
In addition to programmatic strategies that have prevailed through more than a decade of M&A cycles, according to McKinsey research, there are other defenses for uncertain times.
“M&A is merely one lever to pursue growth. If equity markets become unstable, if premiums become too expensive, or when uncertainty exists, other vehicles to consider include alliances, joint ventures, partnerships, or even ecosystems that you establish with other players who are interested in the same space,” Oliver says, adding, “It’s important to come to the table with a portfolio of transaction vehicles.”
The pandemic highlighted the importance of a through-cycle mindset toward M&A. Companies that continued to be programmatic outperformed—they were agile, nimble, and willing to invest behind strategy and its pivots via M&A.Andy West
One thing is certain: No matter what the market delivers, superb execution remains critical—and within reach. Stick to the fundamentals, be clear about growth expectations and organic and inorganic sources of growth, Andy and Oliver suggest, and use M&A as an enabler of well-defined strategies. Sharpen target identification through new technologies such as AI. Do not get caught up in deal fever, and never overpay. Understand where synergies and capital efficiencies will come from.
And when a deal is signed, ensure the integration works flawlessly from Day One through Day 100 to the ultimate integration of the asset. Exceed the market’s expectation of value creation. Then stand up a healthy new business with the operating model, organization, talent, governance, and culture that support the deal rationale and strategy.
When dealmakers can deliver against those targets, the odds of success increase tremendously—along with the likelihood of capitalizing on whatever lies before us in the global market for M&A.