2022 Emerging trends in U.S. Mergers and Acquisitions
2022 U.S. M&A Trends:
1. Private equity deals
Private equity deals continue to be a key driver to the growth in U.S. mergers and acquisitions, representing $1.2 trillion of U.S. deal value in 2021 (breaking the 2019 record by 64%).2 This trend is expected to continue as private equity funds raised a record $733 billion in 2021, are sitting on a record $1.3 trillion of dry powder and seek initial investments and add-on acquisitions.3
2. COVID-19 and related exceptions
COVID-19 and related exceptions in U.S. transaction agreements have become widely accepted as sellers expect buyers to take the risk of such events between signing and closing while doing deals during the pandemic.4 This trend is also expected to continue and also expand to other force majeure events due to the general acceptance by the market of this risk allocation between buyers and sellers.
3. Regulatory scrutiny
Regulatory scrutiny of U.S. mergers and acquisitions has significantly intensified, with increased scrutiny by (i) the U.S. Department of Justice and Federal Trade Commission of deals under the antitrust laws,5 (ii) the U.S. Securities and Exchange Commission of special purpose acquisition companies (SPACs) and their targets,6 and (iii) the U.S. Committee on Foreign Investment in the United States of investments by Chinese companies and state owned enterprises in U.S. companies.7 This trend has resulted in a significant decrease in U.S. SPAC IPOs and de-SPAC transactions, horizontal and vertical mergers as well as Chinese investment in the U.S. and is not expected to change during the Joe Biden presidency due to his administration’s focus on these areas.8
4. Auction jumping
Many auctions for U.S. companies are yielding multiple bidders with similar valuations, and therefore lots of bidders are “jumping” auctions by submitting bids prior to auction deadlines subject to relatively short confirmatory due diligence to get ahead of other bidders. This trend is expected to continue as long as the U.S. deal market remains hot and buyers seek ways to distinguish themselves in a competitive market.
5. “Full equity backstop” commitment letters
Given competitive auctions for U.S. targets involving numerous private equity funds, larger private equity funds are often eliminating the uncertainty surrounding debt financing by offering targets “full equity backstop” commitment letters under which targets can compel such funds to pay the entire purchase price once the applicable closing conditions are satisfied. This trend has favored larger private equity funds in U.S. auctions over their smaller counterparts who cannot offer such terms due to fund concentration limits, and is also expected to continue while the U.S. mergers and acquisitions market remains competitive.
6. Representations and warranties insurance
Representations and warranties insurance has become common in private U.S. mergers and acquisitions to maximize upfront value to sellers and eliminate the risk of post-closing indemnification claims, and buyers are generally expected to obtain and pay for such insurance.9 This trend is also expected to continue as long as U.S. deal activity continues at a record pace.
7. Late-stage growth equity
Late-stage growth equity has significantly increased as private equity funds, mutual funds and hedge funds enter this market that was previously dominated by venture capital funds. 10 This trend is expected to drive U.S. mergers and acquisitions volume in the future as such funds compel or demand liquidity events for their investors.
8. Increased focus on Environmental, Social and Governance factors
Companies and private investment funds are being pressured by investors to increase focus on Environmental, Social and Governance (ESG) matters, and such firms are tracking ESG related data (and requiring the same of their advisors) and scrutinizing targets on their environmental and social goals. 11 This trend is expected to continue as such investors continue to highlight ESG leadership among their desired criteria for such companies and funds.
9. Ukraine related sanctions, due diligence and transaction terms
Buyers and sellers in the U.S. are focused on understanding the impact of Ukraine related sanctions on targets and concentrating due diligence on Russian and Ukrainian operations. The impact of the Russian invasion of Ukraine on U.S. mergers and acquisitions activity and deal terms remains to be seen and depends on the speed in which such conflict can be resolved. A prolonged conflict in Ukraine could cause a freeze in the credit markets and substantial slowdown in U.S. transaction volume.
1 Philip J. Isom, 2021 was a blowout year for M&A – 2022 could be even bigger, available at https://advisory.kpmg.us/articles/2021/blowout-year-global-ma.html.
2 PitchBook, U.S. PE Breakdown (Jan. 11, 2022), available at https://pitchbook.com/news/reports/2021-annual-us-pe-breakdown.
3 Carmela Mendoza, Fundraising hit a new full-year record in 2021 (Jan. 18, 2022), available at https://www.privateequityinternational.com/fundraising-hit-a-new-full-year-record-in-2021/; and Prequin, 2022 Prequin Global Alternatives Report, available at https://www.preqin.com/insights/2022-preqin-global-alternatives-reports.
4 American Bar Association, Private Target Mergers & Acquisitions Deal Points Study (Dec. 30, 2021), at 33 and 58.
5 JDSupra, Biden Antitrust Enforcers Take Aim at Mergers and Acquisitions (Feb. 24, 2022), at https://www.jdsupra.com/legalnews/biden-antitrust-enforcers-take-aim-at-8223350/.
6 James Thorne, SEC’s SPAC scrutiny ensnares marquee deals (Dec. 6, 2021), at https://pitchbook.com/news/articles/sec-spac-investigation-trump-dwac-lucid-churchill.
7 Blair Wang, CFIUS Ramps Up Oversight of China Deals in the U.S. (Sep. 14, 2021), available at https://thediplomat.com/2021/09/cfius-ramps-up-oversight-of-china-deals-in-the-us/.
8 Amrith Ramkumar, The SPAC Ship is Sinking. Investors Want Their Money Back (Jan. 21, 2022), available at https://www.wsj.com/articles/the-spac-ship-is-sinking-investors-want-their-money-back-11642761012; Bloomberg Surveillance, Mario Gabelli Sees Horizontal, Vertical M&A Environment (March 3, 2022), available at https://www.bloomberg.com/news/videos/2022-03-03/mario-gabelli-sees-horizontal-vertical-m-a-environment-video; and American Enterprise Institute, Chinese Investment in the United States, available at https://www.aei.org/china-tracker-home/.
9 American Bar Association, Private Target Mergers & Acquisitions Deal Points Study (Dec. 30, 2021), at 123-124.
10 Michael Ewens and Joan Farre-Mensa, Private or Public Equity? The Evolving Entrepreneurial Finance Landscape (Mar. 3, 2022), available at https://corpgov.law.harvard.edu/2022/03/03/private-or-public-equity-the-evolving-entrepreneurial-finance-landscape/.
11 Brandon Zero, M&A Outlook 2022: ESG Will Stay Front and Center (Jan. 5, 2022), available at https://www.themiddlemarket.com/news-analysis/ma-outlook-2022-esg-will-stay-front-and-center.
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