2021 was a record year for M&A activity. But 2022 might be bigger.
(M&A stands for ‘mergers and acquisitions’ for those unfamiliar). Despite the Covid-19 pandemic impacting large parts of the economy, some investors had better years than ever. Because they were able to borrow capital at a premium, they could invest that capital into companies with strong digital identities — a trend that has become more important as the work world goes remote.
In this article, we look forward to the rest of 2022 and the trends that might explain another explosive year for M&A.
Virtual Due Diligence is Here to Stay
What is virtual due diligence?
In the old way, due diligence required multiple people to travel from different countries to do in-person research on a company they were interested in acquiring. But the Covid-19 pandemic forced investors to get creative. Instead of going to visit in-person, investors use software and digital hardware devices to help them in their research. Think drones and robots.
Why is it here to stay?
Put simply: virtual due diligence is practical and effective.
J. Neely, M&A Global Lead at Accenture has some thoughts:
“Meeting the management team has gotten a lot easier because during the pandemic, they weren’t traveling. Everyone was working from home. So while it was a virtual meet-and-greet, it was far easier to schedule without having to juggle the usual international travel schedules. Touring everything from plants to warehouses was made possible thanks to drones and robots that acted as virtual eyes and ears for human dealmakers.”
This follows a larger trend happening throughout the work world: remote work digital transformation. We already had the tools and methods to conduct business at a distance. The pandemic simply accelerated the adoption of these methods. Neely says that the future of due diligence — and the M&A process as a whole — is like a hybrid model: some of the M&A process in-person and some of the process virtual.
This might speed up the rate of global mergers and acquisitions but there are other factors that may slow this trend down. More on this next.
Regulation might get in the way of M&A growth
In the C-suites of large companies, they’re worried about global regulation. They say deal scrutiny is growing because of several factors. One of which is the rising popularity of SPACs. Another one is rising tensions between regions, which gets in the way of international corporate strategy.
J. Neely wrote about this, too:
“Global regulation is something every M&A executive monitors. You don’t need a crystal ball to see that deal scrutiny is growing, exacerbated by a pandemic-induced emphasis on geographic borders. Increasing tensions between regions are cited by C-suite executives as the biggest uncertainty impacting corporate strategy and investment decisions right now.”
Here’s what he means: M&A activity has been on a tear because the pandemic made the investment world flatter.
ESG will play a larger role in M&A as climate change impacts bottom lines
What is ESG?
ESG stands for environmental, social, and governance.
What does it have to do with M&A?
Most notably, businesses have to adjust to the changing climate. Temperatures are rising and weather events are more extreme. From a business perspective, this can take a toll.
Deloitte wrote about the ESG concerns that private equity firms and what those involved in M&A need to know:
“The urgency around ESG investment and the value at stake have a tangible effect on M&A activity:
- More than 30% of businesses have witnessed operational impacts from climate change
- In 2019, natural disasters caused an estimated $137 billion worth of losses
- Nearly 8 in 10 responding consumers are changing buying habits
- Around half of employees reconsider where they work.”
There you have it: ESG has an impact on operations, finance, marketing, and HR. These are important factors for investors to consider when thinking about mergers and acquisitions.
Huge acquisitions of startups will continue
Last year, we saw massive acquisitions of private tech startups. Some notable ones include:
- Intuit bought Mailchimp for $12 billion
- Microsoft bought Nuance for $19.7 billion
- Citrix bought Wrike for $2.25 billion
- Square bought Afterpay for $29 billion
As of March 2022, we’re seeing a similar trajectory for acquisitions activity:
- Google buys Mandiant for $5.4 billion
- Snowflake buys Streamlit for $800 million
- Cloudflare buys Area 1 Security for $126 million
- Intel plans to acquire Tower Semiconductor for $5.4 billion
- Sony buys Bungie for $3.6 billion
- Microsoft acquires Activision Blizzard for $68.7 billion
It’s only Q1 but it seems likely that 2022 will be an even bigger year for M&A.
The acquisition market you haven’t heard of
In this article, we talked about the biggest of the big. Mega-firms acquiring private startups. Big fish in big ponds. But there’s plenty of M&A activity in the smaller ponds, too. MicroAcquire knows all about this.
They’re a platform that allows founders to get acquired by connecting them directly with buyers. The acquisitions on MicroAcquire are much smaller than we’ve told you about in this article — think in the 100s of thousands or a few millions. Deal size aside, over 500 founders have sold their companies to date — with many more to come. But let’s say you’re a fund manager or solo capitalist; you pool together LP capital to complete deals.
With Allocations and MicroAcquire’s new partnership, you can build an SPV to acquire a startup in minutes.
Disclaimer: The information provided in this document does not, and is not intended to, constitute legal, tax, investment, or accounting advice; instead, all information, content, and materials available are for general informational or educational purposes only and it represents the personal view of the author. Please consult with your own legal, accounting or tax professionals.