K&L Gates partners Richard Hayes and Rick Giovannelli share their 2022 predictions for the M&A market in APAC and the Americas.
If you’re portraying yourself as an ESG-focused business, regulators are going to want to see that you’re walking the walk as well.Rick Giovannelli, US-based Partner, K&L Gates
Ansarada: I’ll start with an overview question. Coming up to the end of 2021 and into 2022, how do you expect M&A activity to pan out?
Rick Giovannelli: For the first few months, I expect activity to be running at as much capacity as the system can handle. In the United States, as you probably know, many people are forecasting that the Biden administration and Congress will pass a tax increase at some point in 2022. That is driving a tremendous amount of activity right now, as business owners and other sellers are looking to harvest gains without the additional tax burden that they believe will be in place next year. So, there’s a huge pressure in the market to close deals by the end of the year.
I believe dealmaking activity in Q4 last year was among the busiest quarters in M&A history. We expect the volume of deals this year to be very similar, if not surpassing last year’s performance. In fact, what we are seeing now is that the system is operating literally at full capacity, and service providers are having to actually turn down deals. Investment banks are needing to be selective on which deals they undertake, which is introducing significant delays into the due diligence process. Towards the end of last year, we saw delays around underwriting warranty insurance policies. I believe we’ll see that again this year.
Ansarada: You operate in different regions, but I know you both work globally. Which sectors and regions do you feel will be the most active going into 2022?
Richard Hayes: Within Australia and also worldwide, we’ll see growth in tech deals, particularly within the fintech and reg-tech space. Online businesses will generally remain strong and their attractiveness to be acquired will remain high. A good example of this trend is Sinch’s recent acquisition of MessageMedia, and there are plenty of others in the pipeline.
Rick Giovannelli: I agree. I think tech will remain very active. As a whole, the sector is going to be incredibly hot – particularly healthcare technology, while interest in fintech is incredibly strong. We’ve seen more capital raised in fintech over the past year, I think, than in any point in history.
The recently passed Infrastructure Bill in the United States looks set to drive additional M&A activity in the manufacturing, construction and possibly logistics sectors, as companies look to take advantage of government spending opportunities. Another sector which looks set to remain very, very hot is renewable energy. That’s driven largely by both the Infrastructure Bill, as there are large set-asides for renewables, but also the increasing emphasis on ESG here in the US and worldwide. Companies are increasingly looking to deploy capital into the ESG space – and renewable energy is now front and center on the corporate agenda.
Ansarada: ESG, tech and digital look set to be primary drivers of M&A coming into 2022. Aside from these trends, what others do you see on the horizon? Do you expect an increase in distressed activity, for example?
Richard Hayes: In the distressed space, and from an Australian perspective, we’re heavily reliant on travel and tourism and some businesses have come under significant pressure. That’s created some opportunities. For example, one of our two largest airlines, Virgin, went through a period of administration before being acquired by Bain Capital. We’re seeing activity related to regional airlines across the APAC region as a whole.
Rick Giovannelli: I think supply chain issues are no longer under the radar since the interview took place. I would change this to “I think something that could prove to be a catalyst for M&A is the supply chain challenges that so many businesses are experiencing. There are construction delays, fuel shortages in the UK, the chip shortage is impacting a lot of businesses and certainly there’s the labor shortage here in the US and elsewhere. I think those two factors are putting pressure on weaker businesses that can’t pay to get labor, or don’t have as robust a supply chain as other businesses.
Some of these supply chain difficulties may result in companies looking to integrate vertically, so that they control a larger portion of their supply chain. We’ve seen some conversations around that, but we haven’t seen a lot of direct activity in that area.
Ansarada: That’s an interesting point. Looking at possible challenges, financing conditions are currently very benign. Do you see this changing in 2022?
Rick Giovannelli: It’s hard to imagine them getting looser, so I think they’re going to
have to tighten. But slowly, from an all-time low.
Richard Hayes: I agree. I think a key question is whether we will be looking at a macro-economic adjustment due to inflation. That may lead to central banks tightening credit, which will have a ripple effect on the financing market. I would not bet against that yet, but it also seems to be that governments are getting comfortable with the inflation that is being reported in some sectors right now.
Ansarada: I want to come back to something we talked about early on in our conversation. How do you think the scrutiny around ESG will affect the dealmaking process going forward?
Rick Giovannelli: I think a lot of companies and private equity funds now have to at least tick the box that they’ve considered the ESG impact of a transaction. This will lead to some additional due diligence on deals to make sure that they understand how the company’s carbon footprint will impact their overall business. It will also drive opportunities for companies that have good ESG characteristics to trade at stronger multiples – they’ll become attractive targets.
I think there is going to be increased due diligence and regulatory scrutiny on greenwashing. If you’re portraying yourself as an ESG-focused business, regulators are going to want to see that you’re walking the walk as well.