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Interest rate hikes to hit M&A deals

By Jenny McCall

10:25, 6 January 2022

A picture of a Mergers and Acquisitions M&A Stock Market Ticker
Corporate mergers and acquisitions (M&A) will be hit by potential interest rate hikes from central banks – Photo: Shutterstock

Experts say corporate mergers and acquisitions (M&A) will be hit by potential interest rate hikes from central banks in the US, UK, and Europe.

Gregory Bedrosian, managing partner & CEO of investment banking firm Drake Star Partners, believes there are several clouds that will hinder the number of M&A deals this year.

“Due to interest rate hikes, deals from a billion in size will continue but we may not see those really mega deals, as boards and C-suites [chief company officers] will be less aggressive,” Gregory Bedrosian told Capital.com.

Bedrosian said the number of transactions would remain about the same but that total deal value may be down because mega transactions were likely to be less active in 2022 than in 2021.

Record year

In 2021 M&As saw a record year with more than $5trn and 55,000 plus transactions, according to Bedrosian. But while low interest rates and access to debt allowed M&A to remain buoyant last year, this may change in 2022 as rates potentially rise.

“In addition to interest rate hikes [there is] the unpredictability of the Covid pandemic. When Covid first hit we did not know if M&A would be impinged – it wasn’t, but I must flag Covid as a risk factor,” Bedrosian added.

Tom Bohn, CEO of ACG Global, an M&A deal-making community, believes the world has learned to navigate the market and there are now fewer unknowns when it comes to Covid.

“I don’t think the variant [Omicron] itself is going to slow down deals. I do think that the volume will decrease in 2022 because the sheer numbers we saw at the end of this year were driven by pent-up demand from the first slowdown and accelerated by concerns that the capital gains tax rate would increase in 2022,” he said.

In 2021 one of the significant highlights for M&A was the rise of private equity firms as buyers. According to experts the reason for this is the “sheer dry powder” that private equity has.

But again, Bedrosian stresses that it has been able to do this due to interest rates remaining low and liquidity financing being available, and those themes drove this trend.

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Tech sector deals

Experts believe the technology sector will be very active this year and that there will be many cross-over M&A deals.

“The tech sector has been incredibly active, and it reached about $1trn of tech M&A in 2021, which is one of the largest years ever in tech M&A,” Bedrosian said.

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“Other sectors that we anticipate will be very active, so financial services and energy sector will be very active and some of that is driven by that theme of cross-over M&A – the energy sector is looking to continue an aggressive theme and move into mobility and acquisitions in the EV [electric vehicle] sector.”

“The data that I saw was that over $1trn dollars of private equity led M&A last year,” Bedrosian said.

This idea is shared by other experts, Tom Bohn from ACG said that those in the M&A community strongly believe technology will be a hot investment in 2022. In addition, the healthcare sector and business services are expected to grow.

Jeff Jacobs, head of M&A execution at financial advisers Solomon Partners, agrees that technology has been attractive in 2021 and will continue in 2022. His firm has focused on areas such as CRM software, cloud, business intelligence analytics and other digital transformation enablers.

Focus on fintech

Within financial services, a lot of focus has been on fintech and bank insurance, according to Jacobs. He says he also sees potential consolidation through M&A as companies seek to protect their supply chains from future disruptions.

“Companies are using M&A to solve bottlenecks and shortages driven by supply-chain issues,” said Jacobs.

“They are also watching for a revival in consumer, travel, leisure and entertainment as the Covid risk declines, but these may be areas where the outlook could change based on the new variant,” said Bohn.

Countries and optimism

Cross-border transactions will continue into 2022, with North America and Europe being the largest M&A markets. But that’s not the only significant thing we will see this year, according to experts.

“Asia may have enhanced cross-border M&A and there could be activity where we see interesting and cutting-edge tech or tech-enabled companies not based in Silicon Valley, London or Berlin but in Africa,” Bedrosian added.

Despite the clouds of interest rate hikes looming, together with Covid and supply-chain issues, the market remains optimistic. Bohn said that in ACG’s second annual M&A Outlook report, 80% of respondents to its surveys said they were optimistic about deal-making in 2022.

“So, I think the general consensus is that deal activity will remain strong, but not quite as frenzied as the end of 2021 has been – 36% of survey respondents said that deal-flow quality and quantity was the primary variable that influenced their positive outlook on M&A,” he added.

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