Following a sharp downturn in the first half of 2020 when the COVID-19 pandemic struck, UK mergers and acquisition (M&A) activity experienced a strong recovery in 2021. Investor confidence returned following the national vaccination programme with more certainty in the UK economic outlook. After the pandemic, many changes were introduced to the market in the context of, value, economic certainty and private equity and has influenced several new M&A trends into existence.

Recent M&A trends indicate what this might mean for deal activity in 2022, with current highlights including:

Deal values rising – in 2020, total global transaction values topped £2.5 trillion, compared to £3.6 trillion worth of deals completed in 2021 – an increase of over 40%, according to data from Bureau van Dijk. This is likely a direct result from the wider trends within the market such as higher investor confidence, increased levels of competition for attractive targets, readily available funds (including private equity) and low financing costs which have all resulted in higher business values.

Increased global transactions – international transactions are increasingly viewed as a speedy route into new markets. 2021 saw an increase of almost a third in the number of UK deals involving n overseas acquirer or investor, illustrating that more buyers and investors are aiming to gain access to UK markets.

Earn outs return –a term is used to describe a system that ensures vendors get full value of their business. It is anticipated that earn-outs would return as the economy recovers. For purchasers who are less certain of business’s value as a result of global uncertainties, earn-outs can allow them to hold back some cash to improve its liquidity. They could also encourage a vendor to sell in the knowledge that it could earn the desired selling prices by achieving specific financial targets after completion.

Increased emphasis on diversity –Gender, ethnic and cultural diversity is becoming an increasingly important consideration for many companies. It’s been noted that issues regarding diversity and inclusion are becoming increasingly relevant in every stage of the M&A process, particularly for due diligence and integration. According to Dr Valeriya Vitkova, Research Fellow at Bayes, research shows the companies with greater diversity and inclusion perform better than their competitors.

ESG objectives drive deal activity – Environmental, Social and Governance (ESG) concerns have been making their way to the forefront in recent years, and is anticipated to continue into the future. As the ESG agenda remains on of the top management goals for global business, it is estimated to drive great deal activity in the future. With the objective remaining resilient in a competitive market, 65% of M&A executives expect their company’s ESG focus to increase. There has also been record-breaking financial sponsors with ESG specific focus, with larger funds coming into action to support transactions within this agenda. As an example, several debt providers are now offering improved pricing to acquirers that involved in ESG-related deals. Evidently, according to statistics from Bain & Company, 1 in 5 deals valued greater than $1 billion focussed on energy transition and a sustainable future.

Fear of interest rate rises and inflation to drive quicker debt-funded deals – the COVID-19 pandemic and the soaring costs of living have driven inflation, which has led to inevitable increases to interest rates. This environment is forecasted to fuel greater urgency to complete deals sooner rather than later.

An increase in digitisation in deal-making – Uncertainty around the pandemic created a need for better digitisation and the use of technology around deal-making. Many businesses already had these processes embedded within their operations beforehand, however travel restrictions and decreased physical workplace interactions over the past two years has seen this accelerate significantly.