KSA, In 2021, corporate dealmakers raced to acquire transformative capabilities and scale rapidly amid soaring valuations. This led to a record-breaking year for M&A deal values, exceeding expectations at an unmatched $5.9 trillion. These are among the findings of Bain & Company’s fourth annual M&A report. The M&A market is likely to remain bullish, as new research suggests an optimistic outlook for deal activity in 2022. Bain’s global survey of more than 280 executives shows a full 89% anticipate their own deal activity will stay the same or increase this year. The environment for deal making remains fundamentally attractive, and a well-balanced mix of market signals suggest the strategic M&A market will continue to be robust. “We remain optimistic about strategic M&A activity next year”, said Dirk Vater, EMEA Head of Financial Services at Bain & Company. “We are on the lookout for risk factors, but do not yet see overarching signals of a slowdown. Nonetheless, it’s important to acknowledge several risk factors that could complicate our positive outlook, such as macroeconomic complications, evolving regulatory scrutiny, and the impact of geopolitical evolutions, particularly regarding China. We are likely to witness an evolution in each of these risk factors in 2022, but no significant changes across all of them are expected in the short term. The major fundamentals for dealmaking remain attractive for buyers, and it is unlikely that there would be a significant change in the relevance of M&A as a growth driver in 2022.” While corporate-led deals grew by 47% in 2021, deals involving financial investors, special purpose acquisition companies (SPACs) and venture capital (VC) firms grew by over 100%. “The M&A market is different today than what it was 20 years ago”, said Jad Zerouali, Head of Bain & Company’s Financial Services in the Middle East. “Executives have to keep up with an increasingly diverse map of alternative deal models such as partnerships and corporate venture capital (CVC). This nuanced and evolving market requires a wide set of skills and a deep understanding of the deal landscape on the buyers’ part.” This new report explores the opportunities presented by the shifting landscape of the M&A market. Success in M&A requires getting a lot of things right, particularly when every asset is priced to perfection. The number one predictor of M&A success?Experience. Bain’s research continues to find that frequent and material acquirers create greater total shareholder returns (TSR) than those who possess a less robust M&A strategy. The Bain report looks in depth at two factors deal making executives must get right to thrive in this white-hot market: talent retention and ESG. It also includes 15 industry-specific perspectives and four country-specific deep dives. Talent retention: a critical factor to deal success M&A practitioners cite talent retention as a leading driver of M&A deal success, second only to having a clear deal thesis. M&A, at any point in time, can cause employees to worry about uncertainty and change, leading them to consider other options. This is particularly pronounced as today’s hot labor market requires a new focus on retention challenges. In tech, for example, more than 75% of executives feel that retention is now more difficult than it was three years ago. The biggest retention risks, according to tech executives, are uncertainty about one’s role in the future organization and attractive alternatives in the labor market. Successful talent retention requires companies to be proactive about talent in both the diligence and integration, establishing a strong and compelling vision for the future that employees can mobilize behind. Dealmakers are behind on ESG Although ESG is quickly becoming a marker of business quality, only 11% of M&A executives say they extensively assess ESG in the deal-making process on a regular basis. However, 65% of those surveyed expect their company’s focus on ESG to increase. In the consumer products industry, for example, 68% of executives view ESG as a means to gain share, improving their brand image and appealing to changing consumer preferences. When looking at the energy sector, energy transition deals accounted for about 20% of all deals greater than $1 billion in 2021, and Bain expects more energy companies to use deals as a way to green existing assets in the year ahead. ESG needs to be more than a check-list item during the M&A process, and it can take multiple forms in deals: acquisitions can be “ESG-motivated” and hinge upon an ESG thesis, or they can be ESG-conscious, pursued for other reasons but with eyes open about the ESG considerations at play. Success in this arena will require linking overarching corporate ESG strategy to M&A strategy, making sustainability a part of each deal thesis and setting ESG as a factor in delivering deal value. Financial Services Industry Perspectives Banking: The banking industry is primed for heated M&A activity. In an era of persistent low interest rates and economic uncertainty, it has been challenging for banks to grow their revenue organically. This positions M&A as a particularly important lever for growth, which could account for 50% of revenue growth in banking in the years ahead, an increase from the already high 35% rate. As the M&A environment heats up, however, traditional banks are facing increasing competition from private equity firms, well-funded digital-native banks, and technology firms buying banks. On this particular topic, Jad Zerouali said, “Whether they pursue integrations or partnerships/JVs, traditional banks will need to focus on delivering strong client solutions at a faster pace if they want to succeed in M&A. That means ending their reputation for being slower and more bureaucratic than technology players.” Payments: The hottest business in payments is “buy now pay later” (BNPL), which now accounts for 5% of all ecommerce sales in the UK. In the US, it is expected to grow by up to 15 times over the next three years, representing a potential $1 trillion in transactions. Incumbent companies in payments are rushing to get in on the act: BNPL deals represented 50% of payments deal value last year. This was embodied by the megadeal of 2021: Square’s all-stock acquisition of BNPL company Afterpay for $29 billion. “BNPL players also are adding more capabilities to bulk up their offerings and boost growth”, adds Dirk Vater. “Sweden-based fintech Klarna made six acquisitions in 2021 alone, everything from online trip planner Inspirock to Apprl, a software-as-a-service platform provider that allows content creators and retailers to work together.” Insurance: Deal activity in the insurance industry was guided by three major themes in 2021: an effort to buy new capabilities, to evolve distribution or to build scale. Consumer-oriented and data-focused capability acquisitions are a growing emphasis in the industry. Likewise, Covid-19 shifted the gameboard on the dynamics of distribution, leading to new strategies and evolved M&A approaches. As it grapples with continued changes, Bain expects the insurance industry will continue to see transformative deals in the years ahead. Asset Management: Large and differentiated asset management companies continued to perform well in 2021, with large-scale players outgrowing the market, and differentiated players further expanding their margins. For the first time since the 1990s, several large banks sought to reenter the asset management industry. Banks are turning to M&A to rapidly scale up their asset management offering as well as differentiate their offerings in terms of geographies and products. Private equity (PE) firms have also shown interest in this field, and many are investing in scalable infrastructures, such as platforms, administration, software, or data. “All things considered; asset management is becoming an increasingly attractive M&A market”, concludes Jad Zerouali. “The sector achieves strong top-line growth, high profitability despite some margin erosion, and overall positive macro trends, such as high savings rates, low interest rates, and anticipated high inflation. The year 2021 will be remembered for a paradigm shift in asset management. Many large banks looked to re-enter asset management after most had deprioritized the business in the 1990s and 2000s.” Wealth management: The wealth management industry has entered a phase of accelerated M&A activity, with deal value records being set in 2020 and 2021. Strategic buyers are pursuing both scale and scope deals to expand their businesses and acquire new wealth-tech capabilities. While for many companies M&A has proven the most efficient way to build scale across the industry’s main sectors and remain competitive, they are finding that scale alone is insufficient for leadership. As a result, scope deals are becoming more critical with the emergence of wealth-tech players that serve new and adjacent wealth management markets.