By Mark Williams, Americas Chief Revenue Officer, Datasite 

While 2021 deal activity has soared, rising 40% higher than the previous high-water mark set in 2007,  2022 activity is on track to be comparable or even higher. We know this at Datasite because new global diligence projects on our platform, which are deals at their inception rather than announced, finished 2021 30% higher than 2020, which means most of 2022 could be another banner year. 

But what exactly is driving this positive outlook, especially at a time when the world is still grappling with the challenges of a global pandemic that is stretching into its second full year? Plus, there are issues around rising global inflation, increased environmental, social and governance (ESG) standards, and supply chain problems? There are several forces at play.

First, corporate cash piles remain at record highs. In Q32021, they were up 11% year-over-year at S&P 500 companies to about $3.78 trillion. Private equity firms, whose 2021 acquisitions accounted for 24% of total global transaction value, have also been steadily fundraising and expect to have record levels of dry powder to deploy in 2022. Additionally, there are around 570 special purpose acquisition companies (SPACs) looking to combine with a business partner this year. 

Second, interest rates are low, and even though they are expected to move up this year — the Bank of England raised its interest rate to .25% in late in 2021, while the US Federal Reserve is expected to begin raising its rates in March  – they are still expected to be low, historically, through the end of the year.   

To be sure, implementing tighter borrowing costs is in response to rising inflation, which in the US and UK is near 5%. Still, companies are planning to invest in capital projects and in growth this year, including divesting non-performing businesses or acquiring new businesses that offer new products, services, or markets. In fact, 32% of 600 global dealmakers across the US, UK and Europe that Datasite surveyed late last year, said they are targeting organic growth potential as the most important consideration for target evaluations in 2022. And judging from activity on Datasite’s platform, this may apply, especially, to deals in the consumer and industrial sectors, where new industrial projects increased year-over-year by 55% in 2021, while consumer projects rose 44% in the same period.  

Many businesses are also focused on completing transformational deals this year, turning to technology and combining with other companies to ensure their competitiveness and to future proof their businesses.  

Finally, while there are still challenges around supply chains and increased ESG risks, these factors are also becoming important value drivers in M&A deals. Yes, global dealmakers identified inflation, ESG risks, labor shortages and supply chain issues as the top deal breakers in 2022 in our recent survey. However, these challenges also present opportunities in some instances. 

Take ESG risks, for example. Evaluating and assessing the risks of acquisitions will require greater care and even deeper diligence. Otherwise, companies could end up purchasing an asset with increased ESG exposure and face significant post-transaction value destruction. We are already seeing this in the unprecedented levels of vetting and due diligence taking place on our platform, where the amount of content stored in new global projects rose 34% in 2021 compared to the same period in 2020. 

At the same time, we are watching ESG transform from check-the-box compliance to a genuine source of value creation. Changing regulations, including policy transition to net zero, and new technologies, like clean tech, are expected to create several new opportunities, especially in the energy and power sector. In fact, almost two thirds (65%) of 400 global dealmakers Datasite surveyed in the fall of 2021 said green energy initiatives will represent the biggest M&A opportunity in the sector in the next five years. Meanwhile, we are also seeing global investors place bets on cleantech, with a primary focus on agriculture, food and mobility, as the largest sources of carbon output. This is reflected, in part, in the increase we have seen in new global technology, media, and telecom (TMT) projects on our platform, which were up 41% in 2021, year-over-year.  

Given all of this, technology and tools to manage the M&A process will continue to be vital to dealmakers so that they can conduct complex due diligence activities to reach successful outcomes. With deal activity expected to rise or remain at the same level, technology and AI-powered tools will be critical in increasing capacity to manage any higher volumes.