Mergers and acquisitions (M&A) were a hot topic this past year. Recordbreaking M&A deals occurred in 2021, and analysts thought this trend would continue in 2022. However, several developments in the first quarter of the year impacted this projection.
Here’s an overview of what’s been happening and what to expect going forward.
Records set last year
M&A experienced new heights in 2021, according to data from KPMG. Multiple sectors set records, including private equity, financial services, technology/media and manufacturing.
CFOs were optimistic about this trend continuing. In fact, in a KPMG survey conducted at the end of 2021, a third of executives expected deal valuations to increase by at least 10% in 2022. Higher-ups planned to use increasing M&A volume as a strategy to recruit top talent during the Great Resignation.
As part of the survey, execs also ranked the top factors they believed would impact M&A in 2022, and they selected:
- High valuations (61%)
- Economic variables – e.g., overall liquidity (56%)
- Fierce competition for high-value targets (55%), and
- Supply chain factors (52%).
Developments that impacted M&A
While some of these factors impacted M&A in Q1 2022, other contributing factors weren’t foreseen. And they significantly changed the landscape for M&A.
For starters, the Omicron variant of COVID-19 ushered in the beginning of the year, along with historic levels of inflation not seen in decades. Russia’s invasion of Ukraine, combined with increased interest rates from the Federal Reserve, made investors a bit gun shy. So M&A slowed down a bit at the start of this year.
Closer look at financial services, B2B payments
One area in which M&A growth didn’t go as expected was financial services, KPMG said. Banking, capital markets and insurance all experienced significant decreases in Q1 2022 compared to the last quarter of 2021.
Despite smaller growth in other financial areas, however, the payments market did experience significant M&A growth this year. And that could have ramifications for you in Finance.
Payment-related M&A deals were influenced by several different developments, according to KPMG, including:
- Fast growth and adoption of electronic methods of payment
- The need to update outdated payment technologies
- New avenues for growth and diversification for payment providers, and
- Increased demand for electronic services that are user-friendly for consumers.
Business-to-business payments are one of the main drivers of growth in the payments sector. The U.S. lags slightly behind other countries with its B2B payments since it’s still primarily using paper checks for many purchases. But the global value for the B2B payment market is expected to grow by almost 11% each year – and it’s projected to reach $70 billion annually by 2030.
M&A in the B2B payment market will primarily focus on firms attempting to extend their reach into profitable payment technologies, including real-time payments. Real-time payments are especially popular with businesses since they allow funds to be instantly transferred with no wait time.
As Finance departments migrate away from paper checks, real-time payments are growing more popular for A/P and A/R staff. That’s a significant part of what’s spurring current growth for the real-time payments sector. By 2030, the global market for real-time payments is expected to be over $193 billion.
More financial institutions are expected to make deals as the market for real-time payments expands. Banks and credit card companies will likely drive M&A activity in this sector so they can grow their payments business and offer more businesses, merchants and individuals access to real-time payments. And this development should create more payment options for your Finance team to present to vendors and customers.
Another finance-related area where deal-making is expected to grow is Bitcoin. In 2021, M&A deals in cryptocurrency increased astronomically in both volume and value compared to 2020.
This trend is expected to continue as tech developments make it easier to use Bitcoin for real-time payments, KPMG said, particularly the rise of the “lightning network,” a decentralized payment network that uses blockchain technology to pay recipients immediately.
Other key trends
Along with growth in the payments sector, several other trends are poised to impact M&A throughout 2022, such as:
- Private-equity activity. Acquisitions by private-equity firms rose in 2021, and they should still be a significant driver of M&A for the rest of this year.
- Tighter liquidity. Now that the Federal Reserve has raised interest rates, it may affect how eager investors are to make deals.
- Digital transformation. With the pandemic continuing to speed up digital transformations at companies, the scale of these projects will pave the way for M&A across multiple sectors.
- ESG initiatives. More execs are making M&A moves based on their environmental, social and governance (ESG) goals. Sustainability and adaptability will be key in decision making this year since many businesses are looking at creating a more positive footprint in their communities.
Smart execs should be rethinking their strategies after seeing how deals played out Q1 2022, keeping these developing trends at the forefront of their decision-making.
The data doesn’t lie: While current conditions may create some additional risks and challenges, there are still gains to be had by going for M&A opportunities this year, particularly in fast-growing sectors.