Cash-rich North American companies are expected to extend their deluge of mergers and acquisitions in 2022 after a record-breaking year in 2021.
The value of M&A deals in North America climbed 81% year over year in 2021 to $2.459 trillion, according to S&P Global Market Intelligence, as activity bounced back with a bang following a COVID-19-disrupted 2020. Annual M&A expenditures had only exceeded $2 trillion once previously, in 2015.
The number of deals was also a record, with the annual total of 23,720 usurping the previous high of 22,782 — again in 2015 — and increasing 33.3% compared to the 2020 total.
The financials sector accounted for the largest value deals overall in 2021 with $570 billion of M&A activity. Real estate, healthcare and information technology were the next biggest at $349 billion, $343 billion and $338 billion, respectively.
Healthy balance sheets and cheap debt encouraged companies to expand at break-neck pace in a fast-growing economy. While that pace may slow in 2022 with interest rates expected to rise and economic growth potentially slowing, M&A activity should remain strong.
"Looking at the fundamentals, the corporate profit outlook, there are no reasons to think why the cycle would come to an end," Karolina Noculak, investment director at abrdn, said in an interview. "The interest rate rises may put a bit of a dampener on this activity but not enough to derail it."
U.S. companies have bolstered their cash positions over the course of the pandemic, aided by cheap borrowing costs and climbing profits. Seasonally adjusted corporate profits of $2.916 trillion in the third quarter of 2021 were up 19.7% compared to a year earlier, according to the U.S. Bureau of Economic Analysis.
The economic growth rate may slow as the quick gains from reopening are unwound, but financial services group Morningstar still forecasts GDP growth in the U.S. of 3.9% in 2022 and 3.5% in 2023.
"The outlook for strong economic growth will provide confidence for managers that now is a good time to make acquisitions," David Sekera, chief U.S. market strategist at Morningstar, said in an email. "In addition, many companies' equity prices and valuation metrics are at their highs and those companies may look to use their stock as currency to fund acquisitions."
Private equity made headlines last year with high-profile deals, particularly in the healthcare sector, and that is expected to continue in 2022 with a reported $3 trillion of "dry powder" to play with.
"This is especially true among the [special purpose acquisition companies] issued in 2020 that may start to run up against their two-year window in which they have to conduct an acquisition before having to offer to shareholders to return their capital," Sekera said.
Favorable credit conditions will also support expenditure. "M&A activity is likely to increase in the future," said Viktor Hjort, global head of credit strategy, at BNP Paribas. "This is primarily a result of the attractive cost of borrowing and healthy market conditions."
Value of M&A dipped in Q4'21
AT&T Inc.'s $103 billion agreement to merge Warner Media LLC with Discovery Inc. was the largest piece of business in 2021. The deal is reflective of the hot competition in the streaming sector, with Discovery President and CEO David Zaslav expecting the combined entity to attract 200 million to 400 million subscribers.
The value of cross sector M&A declined slightly in the fourth quarter of 2021 to $519.93 billion. This represented a quarter-over-quarter decrease of 13.3% and was 16.8% lower than in the fourth quarter of 2020, when the rebound in M&A was already under way.
Oracle Corp.'s $30.13 billion takeover of Cerner Corp., the second-largest provider of electronic medical records in the U.S., was the largest deal in North America in the last three months of 2021.
The $20.86 billion buyout of security software company McAfee Corp. was the second-biggest deal of the quarter and was another big private equity M&A deal in a sector that saw Proofpoint Inc. sold to Thoma Bravo LP earlier in 2021.
The third-largest deal in the quarter was also in the healthcare technology sector as athenahealth Inc. agreed a $17 billion deal to be acquired by affiliates of Bain Capital and Hellman & Friedman.
"A lot is going to depend on the growth outlook. If rates rise and the economy slows, that's a negative [for M&A]," Noculak said, but she noted that some sectors, particularly tech and healthcare, will be able to do as they like. "Highly cash generative companies are immune to interest rate rises as they are largely self-funding."