Taxand Global Guide of M&A Tax 2022

Global M&A in 2021 was busier than ever. More deals were inked and deal values reached previously unseen levels. This was a bit surprising considering that the world was dealing with COVID-19 and just a year earlier, the global markets had come to a grinding halt. Several factors have played a role in getting us to where we are currently. To start with, the markets have learned to live with COVID-19, a Black Swan event that we had not seen, nor perhaps expected to see in our lifetimes. The pandemic “financial crisis” was at its low point at the beginning of summer of 2020, but, by mid-summer, the pace of global deals had started to pick back up. By the end of 2020, global M&A activity had reached the USD3.6 trillion level, according to Refinitiv data, a mere 5% decline versus 2019. This, despite continuing lock downs and supply chain disruptions.

By the time 2021 arrived, the deal market was in hyperdrive. Having learned lessons well from the 2007 financial crisis, dealmakers clearly looked for opportunities during the pandemic and then recorded the most robust M&A market in history. It did not hurt that most dealmakers – and policy makers for that matter – believed that in one key global market, the USA, the federal government was going to raise the capital gains tax rate with an effective date in 2022. As a result, there was virtually a sprint to get deals done before tax rates rose. Further, ongoing historically low interest rates and continued high levels of so called, “dry powder” – capital available to invest – added fuel to the 2021 M&A blaze. For reference, private equity funds (“PE funds”), hedge funds and sovereign wealth funds together are reportedly in possession of almost USD2 trillion of “dry powder” raised over recent years. Other external factors that proved not to dampen the historic M&A market were the run up in inflation, reaching 40-year highs and spiking energy prices. Finally, certain industries led in M&A and were clearly a strong play during periods of lockdown. For example, according to Bain & Company’s 13th annual Global Private Equity Report, roughly one in three buyouts involves technology assets. Further, growth in sectors such as healthcare, fintech, and business services means technology is currently a key investment component in more than half of all deal activity. At the other end of the spectrum, M&A in areas such as luxury brands and the travel industry suffered during 2021, as a result of lockdowns and the pandemic.

Enter 2022. The first quarter of 2022 brought with it additional macroeconomic factors that at some point are likely to impact M&A. The war in the Ukraine is one such notable factor in so many ways, but specifically considering the M&A environment, we know and already see the direct impact in particular on energy and other key commodity supplies and their pricing. In the transactional environment, whether the conflict will directly impact the overall number of global deals and, or, how it will rather be more broadly impactful on a range of macroeconomic data points that ultimately impact supply chains, the cost of goods or R&D resources in the technology space, amongst many other things remains to be seen; but ultimately there will be changes, including those which influence both business models and valuations.