2021 proved to be a record year in terms of both value and volume of completed M&A transactions (USD 5.9 trillion to be precise). Despite the lingering effects and uncertainty of Covid-19 and its very many variants (Omicron being the most recent), 2021 was largely marked by the remarkable ‘rebounding effect’ from 2020 and the increased activity seen in the global M&A marketplace, with corporates pursuing deals to accelerate economic expansion (or arguably in some cases, post pandemic recovery). Looking back on the previous year, we can now appreciate that the 2021 M&A space was marked by numerous advantageous opportunities, including but not limited to corporate players capitalising on:
(i) low interest rates (making debt financing attractive and available to corporate borrowers);
(ii) global optimism about prospective vaccines and hopeful returns to pre-pandemic business levels;
(iii) liquid rich balance sheets, and general availability of capital in the marketplace (including from both equity and credit sources);
(iv) high equity valuations; and
(v) a profound likening, and rise in prominence, in SPAC activity.
The question does however remain what can be expected for 2022? Summarily, and whilst important to throw caution to the wind in relation to the inevitable challenges each year presents, the panorama for this year invites optimism, and that absent any drastic or unforeseeable changes, 2022 will be a year arguably spent riding the crest of the wave of momentum formed in 2021
While difficult to predict, it can be considered that corporations will seek to pursue ‘transformative’ M&A deals which seek to add scalability and increased access to new markets, with a strong appetite for strategic operations which can anticipate, overcome or avoid the effects of shortcomings prevalent in 2021, namely: (a) disruptions to supply chains; (b) labour and workforce shortages; and ultimately (c) both novel and recurring geopolitical events which may influence the status quo. Priority may ultimately be given by corporations towards acquisitions or mergers with better prospects of enhancing their digital and technological facilities. The pursuance of opportunities with technologies in place to facilitate e-commerce, logistical and business infrastructures and consumer interfacing solutions may prove invaluable in further growing revenues uninterruptedly (or at least as streamlined as possible), particularly as the need for innovation and growing dependence on technology is increasingly becoming essential to stimulate efficient growth, and simultaneously mitigate against any unforeseeable, yet conceivable adversities.
Furthermore, corporate social responsibility cannot be ignored. Notwithstanding the nascent nature of ESG metrics amongst investors and corporate players, its relevance continues to rise in prominence as time goes on, with sustainability in environmental or societal initiatives forming part of many corporate strategies, and increased ESG due diligence featuring at the core of many ongoing deals. In addition, notwithstanding the concerns over the continuing unpredictable impact of Covid-19, the reality is that many corporations and dealmakers are truly finding their feet, and arguably exhibiting greater comfort and confidence in operating in an uncertain climate. As time continues to pass, it is also true to say that as Covid-19 restrictions are in fact lifted (and in many cases, abandoned altogether), a surge in global cross-border M&A transactions may be on the horizon, with recovering industries such as leisure, travel, hospitality and aerospace riding their own wave of M&A momentum into 2023.
It is however important to remain vigilant and anticipate potential drawbacks which a promising outlook for M&A in 2022 may bring. Importantly, these include increased inflation, together with rising interest rates which may give life to other macro-economic concerns (including increasing financing costs for borrowers, which may well discourage investors from pursuing M&A deals, and depress valuations as buyers accrue, or factor in the additional risk of higher costs in securing capital). Alternatively, this may equally act as a catalyst for buyers in the market to become more selective, with prospective purchasers exhibiting greater precision in terms of time and resources invested in pursuing targets, and which ultimately may also see increased competition in the dealmaking marketplace. All in all, it becomes a question of assessing the risks and realities of one’s convictions in acquiring a desired target, noting that there may well be instances where demand does not meet supply, with the market effectively becoming a safe haven for sellers with inflated premiums being paid in light of increased competition and bidding wars (a potential illustration being Nike, Disney, and Amazon’s prospective race to acquire Peloton).
Finally, the M&A landscape for 2022 may well experience a sense of increased regulation and regulatory oversight with a view to curing any shortcomings or drawbacks in market mechanics made evident by the pandemic. This may well place an onus on parties entering into deals to tighten their regulatory approval covenants in transactional agreements to avail themselves of any subsequent challenges from regulators. Gibraltar is no exception to this with its recent introduction (and continuing implementation) of the Competition Act 2020 and new accompanying regulatory body in the Gibraltar Competition Market Authority. Overall, 2022 presents an interesting landscape full of opportunity in the M&A space, and one which in the case of Gibraltar, proves to be full of potential and promise as we remain hopeful that a favourable resolution of the ongoing negotiations between the UK and the EU over Gibraltar’s prospective bespoke accession to the Schengen acquis comes to fruition, which will likely enhance Gibraltar’s offering as a post-Brexit gateway to the European markets, and see us ride our own wave of momentum in 2022 and beyond.