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Dry powder keg: PE, SPACs and piles of potential M&A cash

Don't let the bearish change in tone in the public markets this month fool you—M&A in North America has just seen its biggest year on record and the stars are aligned for a repeat.

The region racked up a monstrous US$2.9 trillion worth of M&A in 2021, blowing the record of US$2.2 trillion, set in 2015, out of the water.

This ongoing deal frenzy is being fed by several overlapping factors. First, corporates are under pressure to sell assets to improve their balance sheets and reappraise their strategies. Second, private equity (PE) is flush with capital and, where appropriate, is willing to take on these unwanted assets. And finally, there is the wall of SPAC money on the hunt for acquisitions. Corporates looking for buyers seem spoiled for choice.

Sell-side, buy-side

Corporate divestitures and spin-offs in the region totaled US$645 billion last year, surpassing 2015’s previous high of US$604 billion. Stealing the show were AT&T’s US$96 billion spin-off of WarnerMedia and its merger with Discovery, and Dell’s US$62 billion sale of its 81% stake in virtualization software company VMware to shareholders.

Leveraged buyouts (LBOs) in the US also soared last year, reaching US$342 billion in what was the best year since PE’s heyday in 2007, driven by a renewed appetite for supersized megadeals. The US$30 billion buyout of Medline, for example, was the biggest LBO the US has seen in 14 years. In total, the US had five LBOs valued at upwards of US$10 billion and a further 18 in the US$5-$10 billion range. 

Meanwhile, special purpose acquisition companies (SPACs) left PE eating their dust, making 208 acquisitions in the US worth US$416 billion—despite the US Securities and Exchange Commission killing the vibe in the spring with its comments regarding blank check company accounting practices.

The year’s biggest SPAC deal was a US$32.5 billion takeover of healthcare payments platform MSP Recovery, followed by the US$28.5 billion acquisition of electric car manufacturer Lucid Motors and the US$17.9 billion sale of biological engineering company Ginkgo Bioworks.

In reserve 

M&A advisors see no signs of things slowing down—deal pipelines remain packed, as are capital reserves.

Microsoft set the tone for 2022, dropping US$68.7 billion late last week on its acquisition of video games developer Activision Blizzard, responsible for blockbuster titles like Call of Duty and World of Warcraft.

According to Preqin, the global PE industry now has around US$2.3 trillion in dry powder and close to half of that war chest is reserved for the US market. This is a match made in heaven for corporates still planning divestitures that may range from US$100 million to US$10 billion, as they seek to rationalize their operations and hone their strategies. High conviction PE funds well-versed in carve-outs can transact quickly and possess the skills necessary to manage these complex deals.

On the SPAC side of things, there are now 569 listed cash shells in search of a target, according to Dealogic. They typically have up to two years to find a deal, meaning 2022 should see no shortage of de-SPACs.

Deal advisors can expect very little rest this year.