Corporate M&A 2022

The Corporate M&A 2022 guide covers 61 jurisdictions. The guide provides the latest legal information on acquiring a company, antitrust regulations, restrictions on foreign investments, stakebuilding, negotiation, mandatory offer thresholds, conditions for a takeover offer, squeeze-out mechanisms, disclosure, duties of directors, defensive measures and shareholder activism.

Last Updated: April 21, 2022


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Sullivan & Cromwell LLP (S&C) provides the highest-quality legal advice and representation to clients worldwide. S&C’s record of success and unparalleled client service has set it apart for more than 140 years and made the firm a model for the modern practice of law. Today, it is one of the leaders in each of its core practice areas and geographic markets. S&C advises a diverse range of clients on corporate transactions, litigation and estate planning matters. It comprises more than 875 lawyers, who conduct a seamless, global practice through a network of 13 offices located in Asia, Australia, Europe and the United States. S&C is a perennial leader in M&A, having advised on some of the world’s largest and most noteworthy cross-border and domestic M&A transactions. S&C has acted in over USD5 trillion in announced transactions worldwide over the past ten years.


Introduction

M&A activity zoomed to historic levels in 2021 after a significant slowdown in the first half of 2020 due to the COVID-19 pandemic. High equity valuations, historically low interest rates and robust economic growth drove global deal activity over the USD5 trillion mark for the first time ever in 2021, despite continued disruption from the ongoing pandemic. The abundant financing that was available on favourable terms, including low interest rates, provided strategic acquirers with acquisition capital to supplement already robust balance sheets. Meanwhile, public strategic buyers were often also able to use their own stock to acquire targets, with many trading at or near all-time highs – giving them multiple ways to acquire targets in 2021. Private equity acquirers played a large role in driving deal volumes to record levels in 2021, putting to work dry powder that had accumulated during 2020 and also enjoying the ability to access cheap debt financing. Special purpose acquisition companies (SPACs) were also a major contributor to these historic M&A activity levels and arguably led the way in taking the market by storm in 2021.

While many of the conditions for continued strong deal-making activity from 2021 remain present for the time being, there are various headwinds that M&A activity will likely face in 2022. These include a regulatory landscape that could be significantly more difficult to navigate, high inflation and increasing interest rates as a result, and heightened geopolitical tensions due in no small part to an ongoing war in Ukraine – all of which will make 2021 a difficult year to match. A correction in the equity markets in 2022 could also potentially take away a key tool that strategic buyers had at their disposal for acquiring targets in 2021 and could have a particularly negative impact on the technology sector, which experienced record deal-making levels in 2021.

M&A Volume Trend in 2021

The record USD5.9 trillion in deals globally in 2021 was an incredible 64% increase from 2020. This was the strongest annual period for M&A since records first began in 1980, with over 63,000 deals announced globally. The fourth quarter of 2021, which registered USD1.5 trillion in deals alone and ranks as the second largest quarter for worldwide M&A on record, marked the sixth consecutive quarter to surpass USD1 trillion.

Cross-border M&A activity significantly picked up in 2021, totalling USD2.1 trillion, a 68% increase compared to 2020. This was also the strongest annual period for cross-border M&A since records began. The technology, financial services and industrial sectors played a big role, accounting for 39% of cross-border deals.

While the year was there was not a deluge of “mega deals” in 2021, there were 55 deals valued at greater than USD10 billion – which accounted for a total deal value of USD1.1 trillion during the year. Deal making in 2021 saw a record number of worldwide deals between USD1 and USD5 billion – which together totalled USD1.9 trillion, an increase of 115% compared to 2020.

Aggregate transaction value in the USA

In the USA, aggregate transaction value increased 82% to USD2.6 trillion, marking the strongest annual period for US deal making on record. US deals accounted for 44% of worldwide M&A, which was up from 39% in 2020. M&A in the Americas has accounted for over 50% of global deal value for five consecutive years.

Looking outside the USA, deals involving European targets totalled USD1.4 trillion, which was an increase of 46% relative to 2020 levels and a 14-year high. Asia Pacific deals totalled USD1.3 trillion, a 48% increase compared to 2020 and an all-time high. M&A activity in Australia reached USD243.5 billion in announced deals, marking another all-time high.

SPACs

After SPACs raised over USD83 billion through IPOs in 2020, many suggested that 2020 may have been “the year of the SPAC.” However, SPAC activity grew to impossible to predict levels in 2021. In the first quarter of 2021 alone, 312 SPACs raised USD96.4 billion through IPOs. SPACs then announced 335 de-SPAC transactions during full year 2021, totalling USD598.8 billion or 10% of overall global deal value.

That said, SPAC transactions slowed down dramatically towards the end of 2021. According to Barron’s, SPAC IPO filings for the year were down by nearly 76% as of early February compared to the same period in 2021. This was at least in part due to regulatory and legislative concerns, as the Securities and Exchange Commission (SEC) continues to express concern about disclosures by SPACs to their investors. The US House of Representatives has also drafted legislation directed at the often lucrative arrangement between SPACs and their sponsors. Furthermore, the PIPE market (for private investment in public equities) has dried up significantly, putting pressure on SPACs to generate creative approaches to ensure targets that there will be capital available at closing.

Impact of PE transactions

After a quiet start to 2020 for private equity deals, private equity acquirers had record amounts of dry powder to spend in 2021. Taken together with the availability of cheap debt financing, this led to private equity-backed buyouts accounting for 20% of all M&A activity during 2021: more than 14,500 private equity-backed deals totalling USD1.2 trillion. This was an increase of over 55% compared to 2020.

Given the amount of dry powder continuing to sit in the hands of private equity firms, these acquirers may be better positioned to withstand certain headwinds that M&A could face in 2022 such as ongoing stock market volatility and the likelihood of rising interest rates – look for private equity-backed buyouts to potentially make up an even larger share of deals in 2022 for that reason.

Tight RWI market

With the flurry of deals that were seen in 2021, representation and warranty insurance (RWI) became increasingly expensive and in some cases unavailable in practice. As RWI insurers were presented with more transactions seeking insurance than ever before, insurers naturally became more selective and the costs of insurance went up. Many policies also became more stringent, and some deals became effectively uninsurable in the second half of 2021 as the RWI market continued to tighten.

However, the change in the RWI market did not get in the way of deal-making activity in 2021. Instead, as a result of an RWI market offering more expensive insurance that has been decreasing in scope, buyers and sellers started to forego RWI in some private transactions, reverting to traditional indemnity regimes that were typical prior to the development of the RWI market. This trend is likely to continue in 2022 until the RWI market returns to a healthy equilibrium.

Factors in Favour of M&A in 2022

While certain drivers of the record M&A activity levels in 2021 such as historically low interest rates and skyrocketing equity values may not hold in 2022, certain other trends will likely remain and continue supporting a robust M&A market in 2022. According to KPMG’s year-end M&A market survey, executives expect deal making to remain active in 2022 for various reasons, including that companies are feeling pressure to remain on the offensive with their competition, companies still have access to a record amount of cash, the increasingly tight labour market is forcing companies to turn to M&A to acquire talent, and companies feel pressure from investors to increase their own valuations in light of declining equity values across many sectors.

PE dry powder

While 2021 saw a major increase in private equity-based deals, private equity firms continue to have record levels of dry powder – according to PwC, dry powder totalled USD2.3 trillion at the end of 2021, which is 14% higher than the levels at the end of 2020. However, fierce competition for deals is pushing up valuations and putting more pressure on the private equity industry to source targets and generate returns.

Carve-outs and spin-offs

In a strong economic climate and in the wake of sustained pressure from activist investors encouraging companies to narrow their portfolios and focus on core businesses, there were a significant number of large transformational divestitures and/or spin-offs in 2021. US divestitures for the third quarter were up 6.6% compared to the same period in 2020 and up 8.4% compared to the second quarter of 2021. According to Deloitte, divestiture activity in the fourth quarter largely remained consistent with the third quarter, with industrials overtaking technology as the leading sector for divestiture transactions during the quarter. Activism activity increased significantly in 2021, and activists have generally seemed to favour, and are likely to continue to push for, these types of transactions as a means of focusing on simplicity in an effort to maximise shareholder value.

Outside of regular divestiture transactions, 2021 also saw the announcement of significant spin-offs and break-ups of large multinational corporations. In a single week during November 2021 alone, General Electric, Toshiba, and Johnson & Johnson – all founded more than 125 years ago – announced plans to break up their conglomerations into distinct operations. As Forbes put it, this trend marks the “Death to Conglomerates.” It is likely this trend will continue driving M&A transactions in 2022.

ESG

Another trend that continued in 2021 that will likely remain prevalent in 2022 is deal activity being driven by ESG-related initiatives. Companies are facing pressures to focus on ESG issues, which are proving tough to solve – especially as quickly as the market may oftentimes expect. ESG concerns are now starting to drive deals, sometimes exclusively for ESG-related reasons.

In 2021, ESG was a catalyst for M&A deals across numerous sectors. Climate-change deals tripled to more than USD164 billion in the first 11 months of 2021. According to Baker Tilly, last year saw ESG or sustainability mentioned in 4.3% of deal announcements in North America, up from 3.2% in 2020 and less than 2% in 2019.

Key sectors for M&A

M&A activity in the technology sector erupted in 2021, increasing by more than 70% from 2020 levels for a record total of USD1.1 trillion during full year 2021. M&A activity also significantly increased in the financial services and industrial sectors in 2021, increasing by 59% and 56%, respectively, compared to 2020 levels.

The way people work and live have significantly changed as a result of the COVID-19 pandemic. Remote work has been widely adopted, digital healthcare has become increasingly available, and e-commerce has exploded. These trends will likely continue to spur M&A activity in the technology sector in 2022 as new technology companies continue to take advantage of our reshaped environment. The technology sector is not only the largest by M&A volume, but also saw the largest year-over-year growth in 2021 of any sector.

The pharma sector also played an important role in heightened M&A activity in 2021. There has been a strong focus on vaccines and new technologies around healthcare solutions that will likely continue to support robust M&A activity in 2022.

Another area of focus for M&A in 2021 was the financial services sector. Total deal value in the financial services sector also soared in 2021, accounting for 13% of global deal value. Deal activity appeared to gain momentum throughout the year, as banks used M&A as a strategic tool to pursue scale, revenue growth and geographic expansion in an industry facing increasing competition from private equity firms, digital-native banks and technology firms that are buying banks. Banks are another category of potential acquirers that could be less affected by certain M&A headwinds in 2022, as higher interest rates can be favourable to banks and other lenders. According to KPMG’s latest annual survey of M&A sentiment, 75% of financial services executives said their appetite for deal making had risen since before the pandemic. It is likely that 2022 will be another big year for financial services M&A.

Headwinds for M&A in 2022

While certain favourable trends are expected to continue to support M&A activity through 2022, there are some potentially significant headwinds that M&A activity will face this year.

War in Ukraine

Recent weeks have seen a dramatic escalation of tensions in Eastern Europe and, increasingly, across the globe. The macroeconomic environment has become more and more uncertain, and commodity markets have been sent into a tailspin. As a result, some M&A deals are being put on ice until the situation in Ukraine de-escalates. However, if geopolitical tensions continue to heighten, it is likely that this will have a sustained negative impact on M&A activity and potentially in a significant way. In particular, the effects of sanctions imposed on Russia by the USA and various European countries are also still shaking out and are already causing the price of key commodities, including energy, to skyrocket. Continued volatility in the commodity markets, especially when combined with declining equity values and increasing interest rates, could significantly affect the ability and willingness of potential acquirers to engage in M&A transactions.

Inflation and interest rates

With rapidly rising inflation putting ever more pressure on the Federal Reserve to raise interest rates, it is unlikely that acquirers will continue to be able to take advantage of historically low borrowing costs in 2022. The consumer price index for February 2022 rose 7.9% from the year prior, which is the highest increase since 1982. This has resulted in some major financial institutions predicting rate hikes at each of the Fed’s meetings in 2022 (and some predicting this will continue into 2023). The debate has now shifted to become less about whether interest rates will rise in the near term but rather by how much. This may create an environment less conducive to M&A activity than that experienced in 2021.

The SEC’s recent emphasis on enforcement

Under chair Gary Gensler, the SEC has been taking a tougher stance on enforcement in general and appears to be targeting SPACs in particular (in addition to ESG and digital assets). In April 2021, the SEC staff issued guidance regarding the ways in which SPACs account for warrants. Then, in September 2021, the SEC issued further guidance on certain SPAC accounting treatments. In addition, the typical time period for the SEC to review and comment upon SPAC merger proxy statements has significantly lengthened. SPAC deals have already slowed from peak activity levels in early 2021, and these factors may continue to slow down the SPAC deal frenzy that was seen in 2021.

However, there are many SPACs that are already hunting for a target, which could result in 2022 nonetheless being a strong year for de-SPAC transactions. According to data from SPAC Research, over 600 SPACs, with a combined USD162.4 billion in funds, were looking for target companies as of the final week of February.

Developing antitrust regimes in the USA and abroad

Last year brought significant change at the Federal Trade Commission (FTC) in terms of both approach and priority. Now led by new chair Lina Kahn, the FTC has adopted a more aggressive stance to reviewing and challenging deals. The FTC stated in August that it would begin issuing “Pre-Consummation Warning Letters” to deal parties where it could not fully investigate the proposed transaction within the standard 30-day HSR waiting period. Furthermore, a memo authored by Kahn and issued to FTC staff in September stated that the FTC will begin reviewing deals holistically rather than through its conventional means of market-based antitrust concerns. While parties appear to largely be proceeding to close deals despite such warnings, these developments have made the regulatory landscape more uncertain coming into 2022. This effect was then exacerbated by the announcement by the FTC and DOJ in January that they had launched a joint public inquiry targeted at strengthening enforcement against illegal, anticompetitive mergers.

Most recently, Democrats introduced a bill called the “Prohibiting Anti-competitive Mergers Act of 2022,” which among other things seeks to prohibit certain mergers, including those in excess of USD5 billion or that would trigger certain market share thresholds, and provide regulators with the authority to unwind any such deals retroactively (back to January 1, 2000) and block larger deals without a court order. The bill would also provide regulators with additional funding to increase policing powers. While how this bill will be received in Congress remains to be seen, the bill is exemplary of a broader push by lawmakers in recent years for a significantly tighter antitrust regime – which would hinder M&A activity moving forward.

Foreign competition regimes also saw an increase in activity in 2021. In the United Kingdom, the Competition and Markets Authority investigated and took issue with a number of transactions. International competition authorities also appear to be co-operating closely in connection with merger reviews, allowing regulators to rely on their international counterparts for assistance (with co-operation often focused on certain key sectors, including pharma and technology).

These significant developments in the regulatory landscape will likely introduce heightened deal execution risk for deals in 2022, especially for large cross-border transactions. Acquirers will likely have a heightened focus on deal planning and analysis of the regulatory risks involved. This potential change in approach, together with longer average timelines to closing as a result of heightened scrutiny by global antitrust regimes, could slow down deal making and even dissuade some potential buyers from undertaking a transaction. It is also likely that the more uncertain regulatory landscape will be reflected in negotiated transaction documents as buyers and sellers look to allocate heightened deal execution risk.

Scrutiny of foreign investments

There has also been a sustained increase in activity from various foreign direct investment regimes that continued through 2021. Foreign direct investment regimes tend to be less transparent than competition regimes, which makes it more difficult to determine in any particular deal whether clearance will be needed.

COVID-19

Although M&A activity set historic highs during the peak of the pandemic in 2021, global supply chains remain disrupted as a result of the pandemic and new COVID-19 variants are continuing to emerge. In addition, the continuation of the pandemic and disrupted supply chains could make it more difficult to combat increasing economic instability resulting from the ongoing war in Ukraine. This could have negative effects on M&A activity in 2022.

Deal competition

With fewer targets in the market in general following a year that saw over USD5 trillion in M&A transactions, it is likely that acquirers will face stiffer competition for deals. This is especially so given that, on the other hand, there are many acquirers in the market – especially in the form of private equity firms with lots of dry powder and hundreds of SPACs currently searching for a target. This mismatch could be a driver for more companies leveraging an auction process to sell themselves for higher values in bidding wars.

Concluding Remarks

Following a record year for M&A, conditions that could sustain robust M&A activity levels appear to remain present – there are historic levels of dry powder sitting out there waiting to be deployed by private equity buyers, hundreds of SPACs are on the hunt for a target, activist investors continue to pressure companies to focus on lean portfolios which will likely continue to result in divestiture and/or spin-off transactions, and executives see a strong pipeline of deals paving the way for another strong year. Nevertheless, there are some significant headwinds coming into 2022. In particular, the regulatory landscape for M&A is an increasingly complicated one that will require significant resources for transacting parties to navigate properly, increasing interest rates would make it more difficult for acquirers to finance deals, and, most importantly, the ongoing war in Ukraine could significantly alter the deal-making landscape and affect the M&A market in 2022 – especially if geopolitical tensions heighten further. While there is good reason to think 2022 will be another strong year for M&A, 2021 will be difficult to match.

Author



Sullivan & Cromwell LLP (S&C) provides the highest-quality legal advice and representation to clients worldwide. S&C’s record of success and unparalleled client service has set it apart for more than 140 years and made the firm a model for the modern practice of law. Today, it is one of the leaders in each of its core practice areas and geographic markets. S&C advises a diverse range of clients on corporate transactions, litigation and estate planning matters. It comprises more than 875 lawyers, who conduct a seamless, global practice through a network of 13 offices located in Asia, Australia, Europe and the United States. S&C is a perennial leader in M&A, having advised on some of the world’s largest and most noteworthy cross-border and domestic M&A transactions. S&C has acted in over USD5 trillion in announced transactions worldwide over the past ten years.