First Quarter M&A Activity Rises, Despite Inflation and Supply Chain Concerns
By Rusty Wiley, CEO of Datasite
While the pace of some mergers and acquisition (M&A) deals may have slowed in the past few weeks to reflect a variety of factors, from investors struggling with Russia’s invasion of Ukraine and its financial fallouts and a humanitarian crisis, Q1 2022 deal volume is on track to outpace Q1 2021.
With a few more days before the end of the quarter, new 2022 projects on Datasite’s platform, which shows where deals are at their inception rather than announced and a good indicator of what’s to come in the next six to nine months, are up by a double digit percentage year-over-year, when looking at January 1 through March 25.
Still, the situation in Ukraine and international sanctions imposed on Russia has created global uncertainty, resulting in a rise in the cost of raw materials and commodities in an already high inflation environment. This not only prompts additional inflation concerns, but also questions about how global monetary authorities will respond in the next weeks and months.
While the situation in Ukraine has forced some buyers and sellers to reassess or delay in taking action, it’s not the biggest concern on the minds of dealmakers. Inflation and supply chains are. In a poll of 125 global dealmakers attending a Datasite webinar on March 17, close to half (48%) cited US domestic headwinds, including inflation and supply chain challenges, as the biggest issues on their minds right now, followed by how to compete with other private equity firms in an elevated valuation market (32%). Only 14% cited the global impact of Ukraine as a worry.
Looking ahead to the second quarter?
As the global economy continues to recover from the pandemic, investors and companies persist in their strong appetite for investing to scale up, despite valuations remaining high. Even as interest rates have moved up, there is ample capital availability, especially among private equity firms, who continue to keep elevated levels of cash on hand for M&A transactions. With these factors in place, the following are a few areas that may see increased M&A investment interest going into the second quarter.
- Industrials will continue to rise: A push toward greater sustainability is continuing to be a key force for the industrial sector, which is among leading industries in terms of activity on Datasite’s platform, with new industrial, transportation and defense projects up by a double-digit percentage year-over-year Jan. 1 through March 25. This likely reflects the end of the pandemic and increased interest in factory capacity expansions and other capital project activity, as well as the launch of federal projects that are part of the recently passed $1.2 trillion US infrastructure bill.
- ESG credentials are an investment priority: Sustainability and an organization’s commitment and ability to improve environmental, social and governance (ESG) credentials are also expected to continue to be a priority. Key stakeholders, including investors, consumers and regulators are increasingly focusing on ESG-related risks when it comes to a variety of considerations including long-term value creation, purchasing decisions, and disclosures. Employees are also pushing for change in the workplace or looking for companies that align with their values. At a time when many global workers are leaving their organizations as part of the ‘Great Resignation,’ building and keeping talent is becoming even more crucial.
- New trends, and their impact on the workplace: Dealmaking organizations will need to consider these new ESG-focused trends from not only an investment perspective, but also when they consider how best to find and foster M&A talent. A new Datasite survey of 600 global dealmakers shows that 22% said they have seen deals fall apart because of DE&I-related issues, including concerns related to culture and a company’s hiring, advancement, and retention policies. This is part of the “S” in ESG, which assesses the relationship between a company and its employees, customers, and community. However, while two-thirds said diversity in the workplace is very important to them, and more than half said diversity matters to their managers, executive leadership, board of directors, and clients, 21% said they are unsure of how to show allyship with people from diverse backgrounds, citing fears about how to engage appropriately as the biggest factor holding them back.
Moving into Q2, it is becoming clear that creating enduring and sustainable value must be a priority for dealmakers, as it’s affecting both their business and investments. While there is still plenty of uncertainty stemming from the situation in Ukraine, inflation and the continuation of the pandemic, dealmakers must begin now to make transformational moves to embrace ESG to protect their business and investments in the long run.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.