Jon Kenworthy & Alexandra Kamerling

Ansarada: The second half of 2020 and 2021 have seen large amounts of M&A activity – higher even than pre-pandemic levels. Do you think this level of deal activity will continue in 2022?

Jon Kenworthy: I don’t see any signs of activity slowing down. My expectation is that M&A activity will continue on from the very strong activity we have seen over the past 12 months. We initially thought that the resurgence in activity seen from September 2020 was due to pent-up demand from earlier in the summer, when lockdown hit, but it’s continued for far too long for it just to be attributed to this. Simply put, there’s an awful lot of money out there, and that’s driven prices up which in turn drives activity.

Ansarada: And what specific sectors do you expect to be active in 2022?

Jon Kenworthy: The technology sector is set for significant activity, with the COVID pandemic acting as an accelerant of existing trends and driving dealmaking. COVID has driven businesses online – much more communication is done virtually via Zoom or Microsoft Teams, for example. All these new communication tools have become highly valuable and necessary for remote working. Deals such as Slack being acquired by Salesforce is a good example of big-ticket M&A transactions in the technology sector driven by business and societal changes accelerated by COVID. Those changes were happening anyway, but COVID undoubtedly accelerated them.

One industry where we are seeing high levels of activity is media. Even before COVID hit, technological change was driving a lot of M&A activity within the sector. In particular, the growing influence of big streaming services such as Netflix – that’s driven a significant amount of M&A and joint venture activity in the sector.

Ansarada: From a private equity point of view, there’s been a huge amount of activity, with record levels of dry powder in the market. Going into 2022, do you expect to see sustained levels of activity?

Jon Kenworthy: You’re absolutely right – PE firms have raised record amounts of cash. As COVID hit, PE firms were focused on their existing portfolios, ensuring they were in shape to weather the consequences of COVID and the related shutdowns of large sections of the economy. This took focus away from new deals.

However, somewhere between late summer and the final quarter of 2020, they’ve become very active again. A significant factor driving activity is the ease of access to debt financing, combined with record low interest rates in many geographies – the markets remain very benign.

I’m not saying it’s easy to raise debt, but it’s certainly easier than it has been historically. As long as debt continues to be available on the current terms,
PE dealmaking will remain active. 

Ansarada: What do you see as the biggest risks and challenges for dealmakers going into next year?

Jon Kenworthy: Over the past few months we have started to hear people talk about inflation concerns, particularly among high growth businesses. There is a concern that inflation is effectively eroding the value of future earnings, which could have a disproportionate effect on valuations for high growth businesses.

This could in turn impact the debt markets and if the consequence is more expensive debt, deal volume will drop. It’s all a virtuous, or an unvirtuous, circle –
depending on how you want to look at it. I think that has the potential to become a significant overhang in the market. 

There are also some concerns that we’re in a bubble when it comes to valuations. There’s no doubt that pricing is pretty toppy. Some of the activity that we’ve
seen feels fairly late-cycle. And I think those of us that have been around long enough know things don’t stay this buoyant forever. The market will turn at some point – it can be a bit of a self-fulfilling prophecy. I think you will start to maybe see some caution creep into the market as we get into 2022, particularly if you have external factors such as inflation and increased interest rates affecting the willingness to transact deals.

Ansarada: We have seen greater regulatory scrutiny of deals, both in terms of merger control and foreign direct investment. How is this affecting M&A? What jurisdictions or sectors are proving most difficult?

Alexandra Kamerling: The jurisdictions that are proving most difficult are the ones that are more blatantly protectionist. One might think that the US is very
protectionist, but as advisors, we know what to expect. I think what is much harder is some of these newer jurisdictions that are flexing their muscles have got a very wide scope in their new legislation, and quite a lot of discretion. You just have to be really alive to the fact that they might just pick up on your deal and run with it. It is a moveable feast because they are gaining confidence. They’re gaining expertise and picking up transactions.

As things stand at the moment, jurisdictions that are really pulling their weight on foreign investment issues are Germany and China, with countries like Hungary starting to jump up and down. 

Depending on the country, which sectors are in focus will be different, but you can assume that anything touching the semiconductor industry in any of the Asian jurisdictions and notably in China is tough. And you have to accept that you’re going to go in for quite a long scrutiny. But then Germany has also announced that it has a particular interest in the semiconductor industry and they’re looking at any deal that touches that.

Ansarada: ESG is obviously a huge topic right now. How are dealmakers going to deal with that extra scrutiny around doing deals?

Jon Kenworthy: ESG is a hot topic at the moment – it’s on the minds of boards. And because it’s on the minds of boards, it’s on the minds of corporate development directors and heads of M&A. For this reason, it has well and truly marked its place on the M&A agenda. From a dealmaker perspective, if you’re sell-side you need to make sure that you’ve got your ESG credentials story straight, and you’re clear what you’re saying to buyers about where you sit in terms of your ESG compliance and best practice.

On the buy-side, you need to develop a credible ESG diligence product. A client of any level of sophistication is going to want to understand where the target business sits within that spectrum of compliance from an ESG perspective.

Ansarada: And finally, what advice would you give to dealmakers in terms of the actual M&A process at this moment?

Alexandra Kamerling: Certainly, from my perspective I just think there are going to be more deals that are going to take longer to close. I think the gap between
signing and closing seems to be getting ever longer as more and more regulators want to wade in and consider things. And with FDI legislation, very often they’ve got even longer timetables than those that apply under the merger control legislation.

Jon Kenworthy: Scrutiny on deals is getting higher and higher year in and year out. Sell-side preparation is more important than ever. This means being ready, putting yourself in buyers’ shoes, understanding what questions are likely to come down the track, and being clear on your strategy in terms of how you’re going to respond. While this may have been a ”nice-to-have” a few years ago, I would say it is now essential.