The Top 9 M&A Predictions For 2022

By: Friday Capital, Industry Expert, NSW Leaders

As a result of the pandemic, a lot of articles in the business media trying to make predictions for the future in the last two years have barely scratched the surface and focused on the obvious macro effects of COVID-19 on the market. So this year, we, at Friday Capital, thought we would go out on a limb and lay bare for you our predictions for 2022. What you will read below are our expectations based on the numbers we have crunched, the hundreds of conversations we have had and the research we have done to look behind the trends in M&A activity.

1. 2022 will be another strong year for Global and Domestic M&A

With merger and acquisition activity on track to smash records for the year to December 31, we don’t think there is enough inertia or headwinds in the market to slow it down during 2022. Although the headlines in 2021 were captured by eye-watering mega-deals we expect the middle-market to lead the way with M&A activity in 2022.

2. PE has a lot of dry powder to fund M&A activity, but corporations have more

A lot more, in fact. Australian Private Equity Funds are sitting on a well-publicised $27bn of unallocated capital which is enough to keep a local M&A boom running in its own right, but our analysis of the balance sheets of just the ASX 200 (minus financials because they are typically required to hold levels of regulated cash as capital reserves) shows that these 180 or so companies are sitting on cash reserves 9x the value of what is held by Private Equity. When we then add private company balance sheets to the list it leads us to conclude that corporate and strategic buyers will be the main drivers of M&A in 2022 due to their abundance of available capital.

3. Organic growth will be harder to come by as the COVID recovery stabilises

Some businesses have reached the limit of their organic growth capacity as their supply chains and talent pools are stretched to capacity, but acquisitive growth presents as a quick and efficient way to turbocharge growth for these organisations and we expect mid-market business to be the main driver of this theme in 2022.

4. FOMO will do its thing

Don’t underestimate the psychology of deal-making and fear of missing out by C- suite executives and directors because it’s real and we expect will play a significant role in driving M&A activity in 2022. Additionally, shareholders are rewarding companies for M&A activity which is not always the case so we expect this to also be playing on the minds of public company executives and directors.

5. Another year of cheap capital

Despite the noise around the upturn in interest rates, we have actually been enjoying low interest rates for a few years now and we don’t expect the upcycle to be sharp enough in 2022 to have a dampening effect on M&A activity.

6. Succession-driven exits will accelerate

Especially for those businesses with founders/owners who survived the GFC and were looking to wring out that extra bit of value before COVID hit. We expect there to be an acceleration in founder-led exits in the first half of 2022 before tapering off in the second half.

7. Cost of inertia is lower than normal

The amount of market disruption and the fluidity of change driven by COVID-19 and the current technology innovation cycle makes the cost of doing nothing much larger than the cost of action. This inertia is traditionally a key impediment to deal-making for many owners and boards, but the current level of change across markets will encourage some to explore value accretive acquisitions to avoid being left behind.

8. Large complex transformation deals or horizontal mergers are still on the nose

We expect transactions will be vanilla bolt-on or consolidation in nature with the exception of technology-based acquisitions. Every company today is a digital or technology company in some aspect and we expect to see some acquisitions that will, on the face of it, appear incongruous to the acquirers’ strategy, but on second glance will be driven by the acquisition of efficiency enabling technology.

9. The Global SPAC boom will unwind and will not be a material contributor to overall M&A activity in 2022

While SPACs (Special-Purpose Acquisition Companies) had their fair share of the limelight in 2021, we do not expect this trend to continue in the upcoming year as the returns on many SPAC transactions have underwhelmed investors and redemption rates on US SPACs have been running at 50% for a number of months now.

We expect 2022 to definitely be an exciting year with borders open again (both domestic and international) and as we are all getting accustomed to the “new normals” of the post-pandemic world, but we think it will be a prosperous year for business in general.