Kane Wu, Pamela Barbaglia, and Anirban S

LONDON/HONG KONG (Reuters) – Global merger and acquisition (M&A) activity shattered all-time records in 2021, comfortably erasing the high-water mark that was set nearly 15 years ago, as an abundance of capital and sky-high valuations fuelled frenetic levels of dealmaking.

The value of M&A globally topped $5 trillion for the first time ever, with volumes rising 63% to $5.63 trillion by Dec. 16, according to Dealogic data, easily surpassing the pre-financial-crisis record of $4.42 trillion in 2007.

“Corporate balance sheets are incredibly healthy, sitting on $2 trillion of cash in the U.S. alone — and access to capital remains widely-available at historically low costs,” said Chris Roop who co-heads North America M&A at JPMorgan (NYSE:).

Technology and healthcare, which typically account for the biggest share of the M&A market, led the way again in 2021, driven partly by pent-up demand from last year when the pace of M&A activity fell to a three-year-low due to the global financial fallout from the COVID-19 pandemic.

Large corporations rushed to raise capital through stock and bond offering. Financial sponsors sought out publicly-listed companies to woo them.

Inflationary pressures and strong corporate earnings gave executives confidence in pursuing large-scale, transformational deals despite possible headwinds.

“Strong equity markets are a key driver of M&A. When stock prices are high, that usually corresponds with a positive economic outlook and high CEO confidence,” said Tom Miles, co-head of Americas M&A at Morgan Stanley (NYSE:).

Dealogic reports that overall deals volumes increased by nearly two-thirds to $2.61 trillion by 2021. Dealogic reports that dealmaking in Europe increased 47% to $1.26 Trillion, and Asia Pacific grew 37% to 1.27 Trillion.

Although China has not been a major cross-border market, companies from Asian countries have begun to invest in global assets. Raghav Malah, Goldman Sachs’ (NYSE:) global vice-chairman of investment banking and international vice president, said that this trend is expected to continue.

A number of the year’s biggest transactions — AT&T Inc (NYSE:)’s $43 billion deal with Discovery (NASDAQ:) Inc and the $34 billion leveraged buyout of Medline Industries Inc — were announced during the first half of the year. [nL3N2N4326}

But the pace of dealmaking showed no signs of slowing in the second half.

On Nov. 21, KKR made a bid approach for Italy’s biggest telecoms operator, Telecom Italia (MI:), valuing it at roughly $40 billion including net debt in what would rank as the biggest ever private equity buyout in Europe should it go ahead, and the second largest globally.

Easy availability of financing drove private equity deals, with volumes more than doubling from last year to a record $985.2 billion, according to Dealogic.

“Investors are deploying cash at an unprecedented pace which means that, on a global basis, asset valuations have peaked to historic levels,” said Luigi de Vecchi, chairman of Europe, Middle East and Africa banking capital markets advisory at Citigroup (NYSE:).

“The question is whether the prices being paid now will continue to make sense over time.”

Pressured to make their businesses greener and more climate-friendly, company executives have been hunting for targets with the right climate credentials.

“Along with technology and digital transformation, sustainability is here to stay and is a key focus for most boardrooms,” said Citi’s de Vecchi.

Global M&A Volume https://graphics.reuters.com/MA-YEARENDER/zjpqkylqgpx/chart_eikon.jpg

For an interactive graphic, click here: https://tmsnrt.rs/329m9We

BUMPER PAYDAY

After a year of lockdowns, Wall Street’s top investment banks pushed their dealmakers to meet more clients in person to win lucrative mandates to merge companies or defend them against raids by activist investors.

“This year we’re set to exceed $100 billion in global investment banking fees,” said Berthold Fuerst, Deutsche Bank (DE:)’s global co-head of M&A.

“There has been unprecedented demand for almost every single investment banking product,” he said.

After the record-breaking year, bankers are now anticipating a bumper bonus round in early 2022.

Breaking up corporate empires and conglomerates also proved to be a lucrative business for investment banks.

In the second half of the year, General Electric (NYSE:), Johnson & Johnson (NYSE:) and Toshiba (OTC:) were among large corporates that announced plans to split up their core businesses and spin off several units.

The dealflow is showing no sign of slowing down as companies and investors rush to sign deals ahead of possible interest rate hikes.

Borrowing costs are widely expected to inch up in the coming months with the U.S. Federal Reserve indicating it will increase rates next year to combat soaring inflation. Nonetheless, bankers expect dealmaking activity to remain robust.

“I don’t think upward movement in interest rates alone is going to be the catalyst that sidetracks the M&A market,” said Morgan Stanley’s Miles.

Top deal advisers are concerned about the fallout from the U.S. Federal Trade Commission’s (FTC) increasingly adversarial stance towards merger activity over the past year, with Nvidia (NASDAQ:)’s proposed $40 billion takeover of British chip designer Arm among the latest deals it is trying to block.

“The FTC and Department of Justice are already taking more time than ever before to evaluate deals, so companies pursuing M&A must be ready to discuss their deals with regulators up front, at any time,” said Krishna Veeraraghavan, an M&A partner at law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP.

He added that companies would need to wait longer to get deals through – up to a year and a half versus the usual 6-12 months – and should go into a merger “willing to litigate”.

For all the headwinds, the year ahead still offers plenty of opportunities as the market for special purpose acquisition companies (SPACs) has recently reopened, with new listings in Europe, after coming under regulatory scrutiny in the United States.

“With private equity and with the dry powder in the SPAC world we expect the momentum to continue well into 2022,” said Philipp Beck, head of EMEA M&A at UBS.