Aon’s latest global M&A Risk in Review report finds reasons for optimism in 2022, but the broker cautions dealmakers that headwinds persist in the wake of the COVID-19 pandemic.
Dealmaking reached record heights in 2021, thanks to a confluence of factors, according to Gary Blitz, global co-CEO of M&A and Transaction Solutions at Aon. He explained: “Last year, when we thought we were coming out of the pandemic, the economy was supported by cheap money and liquidity from the government. There were also concerns, at various stages, of tax rates going up.
“Those two things together created a perfect storm to really drive valuations to be high, which would encourage many owners of businesses to want to sell, and there was relatively inexpensive financing to do that. So, it really proved to be a very active market.”
In 2022, Aon believes that last year’s resurgence of M&A activity can be somewhat sustained, albeit perhaps not at the record levels seen in 2021. Dealmakers today are up against new forms of volatility, including geopolitical uncertainty triggered by Russia’s invasion of Ukraine, inflation and potentially stagflation, a rising interest rate environment, changing tax and regulatory landscapes, the rapid acceleration of the digital economy, and a very complex cyber risk landscape.
“A lot of things have changed very quickly. People talk about different headwinds in the marketplace, but I think the main headwind is the volatility that all these events bring about,” Blitz told Insurance Business. “For an M&A deal to happen, you need a buyer and a seller who are confident enough that the purchase price they’re agreeing to is the right price – but if things are moving around too quickly, positively or negatively, it’s very hard to make that deal.
“It’s not that M&A activity [significantly drops] if we go into a recession, or if interest rates change, or even if there’s inflation; what the market needs is a sense of stability so that people can make those deals.”
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What does the current volatility mean for M&A activity in 2022? Blitz believes this will be a “different year, with different deals”. Aon’s M&A Risk in Review report, which focused on Q1 22, showed a particularly strong outlook for M&A in sectors such as technology, media and telecom (TMT), whereas dealmakers were more skeptical about prospects in the energy, mining and utilities (EMU) space.
However, Blitz pointed out: “There was very little interest in Q4 21 and Q1 22 about the EMU space, but fast-forward a couple of months, and we now have an energy industry that’s ripe for restructuring because of all the problems that have arisen out of the war in Ukraine. So, I think we’re going to see a lot of deal activity there, and some distressed transactions.”
There are ways for dealmakers to protect themselves from market volatility, including multiple insurance solutions – such as reps and warranties insurance (R&W), tax liability insurance, intellectual property insurance, and more – as well as heightened focus on diligence.
“In a very busy, frenzied time, dealmakers don’t always think about insurance solutions, but anything you can to do take potential risks off the table is very valuable,” said Blitz. “A heightened focus on diligence is also critical, whether it’s on human capital issues, regulation, environmental, social and governance (ESG) issues, or cyber. In this environment, there’s just less room for mistakes, so the more homework you can do, and the more you can transfer risk to third parties, the more likely a deal will turn out the right way.”
R&W insurance is designed to cover unknown and unintended breaches of representations and warranties made in M&A agreements. The market has grown in tandem with the explosion in dealmaking, to the point where Blitz believes R&W insurance has “become the standard in private M&A deals”.
“People are purchasing R&W insurance because it allows for a much more economically efficient transaction, where the seller gets to take on more proceeds at closing, rather than leaving money behind in an escrow. That’s important in this economic environment because their returns are under more pressure - and the buyer can still be protected by insurance,” he explained.
“I think what we will see in this period of volatility is bigger limits being purchased on any one deal, because a buyer may be more risk averse than in other times, as well as more focus on the breadth of the coverage. This is also good for R&W insurers because the buyers and their advisors have more desire to dig in deeper on diligence, so I think insurers will benefit from that perspective.”