Mergers and Acquisitions: 2022

The year 2021 was a remarkable one on many levels for M&A and the transactional market. While it was, to a significant degree, a continuation of the incredibly strong market that began in the middle of 2020, few predicted such record-breaking activity at the outset of the pandemic just several months earlier. Records were shattered across every dimension—M&A volume and number of transactions, in the United States and globally; private equity transactions; the SPAC phenomenon; and IPOs, to name just a handful. All in the midst of the ongoing Covid-19 pandemic, uncertainty regarding the timing of transitions from remote to conventional working arrangements, a volatile global economy, supply chain disruptions, more aggressive antitrust enforcement, and the prospect of increasing interest rates. These headwinds were overcome by improving economic conditions, unprecedented stimulus and central bank liquidity initiatives, uncertainty about whether potential tax reform would increase tax costs to sellers, low interest rates, increased optimism amongst corporate executives in the U.S. and across Europe as vaccine programs were successfully rolled out, and receptivity in the markets to announced transactions, among other factors. As a result of these and other dynamics, in 2021, total deal volume was the highest it has been since recordkeepers began tracking M&A volume, with over $5.8 trillion of deals recorded globally for the year. Total deal volume in 2021 increased more than 60% relative to the $3.6 trillion recorded for total deal volume in 2020 and increased over 50% relative to the $3.8 trillion recorded for total deal volume in 2019. Over 63,212 transactions were announced in 2021, a 24% increase to the 50,871 transactions announced in 2020.

The unprecedented levels of activity were driven in part by megadeals, including Canadian Pacific’s $31 billion acquisition of Kansas City Southern (following a bidding war with attempted interloper Canadian National Railway in which Canadian Pacific ultimately emerged victorious), Square’s (now Block’s) $29 billion acquisition of Afterpay, Rogers Communications’ $16.5 billion acquisition of Shaw Communications, AT&T and Discovery’s deal to combine their media assets into a new publicly traded company with an enterprise value of approximately $132 billion, the $30 billion club deal for Medline involving Blackstone, Carlyle and Hellman & Friedman, and Oracle’s $28.3 billion acquisition of Cerner, as well as blockbuster de-SPAC transactions including Grab’s $34.3 billion combination with a private equity-backed SPAC and MSP Recovery’s $32.5 billion SPAC merger. That said, while mega-mergers were an important contributor to the year’s overall M&A activity, they comprised a proportionately lower percentage of deal volume than in 2020, likely reflecting hesitation to pursue large transactions in the current antitrust environment, in particular in industries that are the subject of geopolitical tensions and/or regulatory scrutiny such as technology, healthcare, and semiconductors. We expect this trend to continue, but as in 2021, the impact may be mitigated by more and larger deals involving SPACs and private equity firms.

In addition to whole company acquisitions, 2021 witnessed announcements of numerous high-profile separations, carveouts, and spinoffs, including 3M’s combination of its food safety business with Neogen in a Reverse Morris Trust transaction valued at $9.3 billion, General Electric’s announcement of plans to spin off both its healthcare and renewable energy, power and digital businesses, creating three standalone public companies, Blackstone’s $2.2 billion

acquisition of a 9.9% stake in AIG’s Life & Retirement business in connection with AIG’s planned separation of the business, Johnson & Johnson’s planned separation into two independent publicly traded companies by spinning off its consumer health business, eBay’s sale of a majority of its Korean businesses to Emart for $3.8 billion and sale of part of its stake in Adevinta to Permira for $2.25 billion, Grupo Televisa’s combination of its content and media assets with Univision in a transaction valued at $4.8 billion, and Dell’s spin-off of its 81% equity ownership of VMware. Spin-offs, in particular, continue to be a focus of activists pushing companies to try to unlock shareholder value.

As we kick off 2022, we look back on a record-breaking year and discuss expectations for what last year’s blistering pace may mean for the year to come.

Technology M&A

The technology sector continued to drive M&A in 2021, with 21.3% of global M&A volume ($1.24 trillion) and 28.4% of U.S. M&A volume ($727 billion) involving a tech company on either the acquiror or target side (or both). Notable transactions included, among others, Square’s $29 billion acquisition of Afterpay, Entegris’s $6.5 billion acquisition of CMC Materials, Aurora Innovation’s $11 billion de-SPAC transaction with Reinvent Technology Partners following the combination of Uber’s self-driving business with Aurora, and Microsoft’s

$16 billion acquisition of Nuance. Private equity backed a record volume of tech deals in 2021, announcing over $400 billion in U.S. tech deals as compared to $196 billion in 2020. Significant PE-backed tech transactions included Thoma Bravo’s $10.1 billion acquisition of cyber security firm Proofpoint and the $14 billion acquisition of McAfee by a consortium of PE investors.

The tech sector’s continued strong performance was driven in part by the fact that many technology-focused businesses were less affected by—or even benefitted from—the economic and social impact of Covid-19, as well as the need for companies to acquire new technologies to remain competitive in industries that are constantly innovating and changing, a trend that is unlikely to abate in 2022. As one example, logistics software became a highly desirable asset in 2021 given global supply chain disruptions—Panasonic’s $7.1 billion purchase of an 80% interest in Blue Yonder, a U.S. supply chain software company, and American Eagle’s $350 million acquisition of Quiet Logistics are just two illustrations of this trend. Another example is the explosion of deal activity in the electric vehicle industry—electric vehicle companies Rivian and Lucid Motors went public in 2021 at massive valuations despite not having generated meaningful revenue, and a number of large automakers have announced joint ventures to produce electric vehicles and/or critical materials for EV cars. The burgeoning blockchain and cryptocurrency sector also witnessed growing M&A activity, with notable transactions including Galaxy Digital’s $1.2 billion acquisition of BitGo.

At the same time, headwinds in the form of public interest and intense regulatory scrutiny could signal a more complex environment for tech companies in the coming year and beyond.

Global regulators are closely examining transactions involving tech companies, in some cases even ordering companies to undo previously consummated transactions, such as the U.K. Competition & Markets Authority’s (CMA) order that Facebook (now Meta) divest Giphy to an approved purchaser and the Federal Trade Commission’s (FTC) late 2020 challenge to Facebook’s acquisitions of WhatsApp in 2014 and Instagram in 2012 (which recently survived a second motion to dismiss). Further, various legislative bills currently pending in Congress have the potential to fundamentally reshape the ability of tech companies to engage in M&A and the costs to both buyers and sellers of doing so, including the Trust-Busting for the Twenty-First Century Act, which would prohibit companies over $100 billion from engaging in acquisitions that lessen competition “in any way,” and the Competition and Antitrust Law Enforcement Reform Act, which would shift the burden of proof in certain sufficiently large or consequential transactions from the regulatory agencies to the merging parties, who would be required to establish that the acquisition will not materially harm competition. Finally, news reports in the early weeks of 2022 described preliminary SEC planning to amend the “held of record” definition, which would have the effect of subjecting a greater number of private companies to the extensive disclosure requirements applicable to public companies under federal securities laws. These changes, if implemented, would align with SEC Chairman Gary Gensler’s commitment to increasing transparency, but would come at significant cost to private companies, including many Silicon Valley startups that typically rely on private funding for many years before going public. Relatedly, the London Stock Exchange is reportedly considering the creation of a special market for private companies to publicly trade shares in specified trading windows, which, if implemented, may be an attractive alternative to IPOs for private tech companies.

These and other regulatory developments reinforce the importance of conducting careful diligence and considering the possibility of prolonged regulatory review when allocating risk in transaction agreements, as well as utilizing creative legal and structural technology to ensure successful outcomes.

Private Equity Trends

Private equity was another primary driver of M&A activity in 2021, with global PE volume increasing approximately 111% in 2021 compared to 2020, ending the year at approximately $1.2 trillion worth of deals. The increased activity levels were fueled by, among other factors, the availability of capital and low interest rates, as well as the deployment of massive amounts of dry powder that PE firms had been amassing for the past few years during a rising market environment. As a result of these factors and others, PE was a major source of dealmaking in 2021 (approximately 20% of overall global M&A volume), notwithstanding market records and significant ongoing competition from strategic buyers.

Looking ahead, one trend to watch for is a possible resurgence of PE club deals (where two or more firms band together to buy a company), which had fallen out of favor following the 2008 financial crisis, but which may be coming back as PE firms look for opportunities to deploy significant capital in transactions involving large targets while strategic buyers face potential regulatory constraints. Indeed, 2021 witnessed the largest buyout involving a club of PE firms since the financial crisis, with the acquisition of Medline by Blackstone, Carlyle and Hellman & Friedman. Further, major PE players are planning additional capital raises projected to result in record-size funds and unprecedented levels of dry powder. Among many others, Blackstone and Apollo are reportedly preparing for major fundraising efforts (with Blackstone reportedly planning to target as much as $30 billion). We expect that sponsors will continue to pursue acquisitions and actively look for creative opportunities, with PE activity boosted by access to financing, as well as by a greater availability of potential targets as regulatory concerns cause hesitation among strategics and activists continue to prod companies to become more focused on just their core businesses.

Finally, in 2022, we may see an increase in private equity groups going public through the IPO process, as privately held buyout firms seek to share in premium valuations enjoyed by the largest, U.S.-listed funds. There were a few private equity IPOs in 2021—including Bridgepoint, Blue Owl and Antin Infrastructure Partners—and we expect the trend to continue into 2022, with TPG listing in January 2022 at a valuation exceeding $9 billion, and other PE firms reportedly considering joining the public markets as well.

Financial Institutions M&A

Global M&A volume in the financial services industry was over $730 billion in 2021 and has continued at a strong pace with over a third of the activity occurring in the U.S. Bank mergers set records in 2021, in particular in the latter part of the year, which saw the announcement of major transactions including BMO Financial Group’s $16.3 billion acquisition of Bank of the West in late December and U.S. Bancorp’s $8 billion acquisition of MUFG Union Bank in September. Other notable deals announced over the course of the year, include Webster Financial’s $10.3 billion merger with Sterling Bancorp, Cadence Bancorporation’s $6 billion merger with BancorpSouth Bank, Columbia Banking System’s $10.2 billion merger with Umpqua Holdings, Valley National’s $1.18 billion acquisition of Bank Leumi’s U.S. bank and Independent Bank’s $1.15 billion acquisition of Meridian Bancorp.

The fintech industry also witnessed substantial consolidation, marked by the $29 billion acquisition by Square of buy now, pay later lender Afterpay. Notably, SoFi announced earlier this week the receipt of all required regulatory approvals to close its acquisition of Golden Pacific Bancorp. Upon the closing of the transaction, SoFi would become the largest fintech to transition to a bank holding company as the convergence of banks and fintechs continues.

In the insurance sector, AIG announced in July an innovative strategic partnership with Blackstone. The partnership included a sale by AIG to Blackstone of 9.9% of AIG’s Life & Retirement business, a strategic asset management relationship and a sale by AIG to Blackstone of affordable housing assets. In October, Chubb agreed to acquire from Cigna insurance businesses in seven Asia-Pacific markets for $5.75 billion.

The strong pace of bank M&A activity throughout 2021 persisted despite President Biden’s July Executive Order directing the Department of Justice (DOJ) and federal banking regulatory agencies to update guidelines on bank mergers. In December, the Federal Reserve announced that they would be reviewing and updating bank M&A approval procedures, and the Antitrust Division of the DOJ issued a release seeking additional public comments on whether to revise its 1995 Bank Merger Guidelines. Partisan tensions came into the spotlight when three members of the Federal Deposit Insurance Corporation’s board posted a request for comment on bank merger rules on the Consumer Financial Protection Bureau’s website without the approval of the FDIC’s chair (who has subsequently announced her resignation). A new chair of the FDIC has not yet been nominated. Other vacancies in key regulatory positions include a permanent Comptroller of the Currency and the Federal Reserve Vice Chair of Supervision.

These vacancies, combined with political pressure from the Biden administration and progressive members of Congress, cast some degree of uncertainty as to whether and how the bank merger approval process might change.

REIT M&A

The year 2021 was an especially active one for M&A involving real estate investment trusts (REITs), spurred in many cases by Covid-19’s continuing ripple effects on the real estate markets, low interest rates, private equity’s voracious appetite, the acceleration of tech disruption, and activists. Major REIT transactions involving both strategic and financial acquirors were announced over the course of the year—including Realty Income Corporation’s all-stock acquisition of VEREIT to create a combined company with an enterprise value of $50 billion, which will be immediately followed by a spin-off of substantially all of the office properties of both companies into a new, self-managed publicly traded REIT, Ventas’s $2.3 billion all-stock acquisition of New Senior Investment Group, Monmouth’s $4 billion sale to Industrial Logistics Properties Trust, Bluerock Residential Growth REIT’s $3.6 billion sale to Blackstone and simultaneous spin-off of its single-family rental business into a publicly traded REIT, Columbia Property Trust’s $3.9 billion sale to PIMCO, CoreSite’s $10.1 billion sale to American Tower, DigitalBridge’s acquisition of Vertical Bridge and its tower portfolio, and Kimco’s $20 billion merger with Weingarten. REIT M&A in 2021 spanned a variety of industry sectors, both traditional (retail, office, senior housing, and residential) and digital (data centers, cell towers, and logistics).

We expect that 2022 will build on the REIT trends of 2021 as the real estate environment continues to evolve, including in response to the pandemic, changes in residential and commercial real estate and the shift to online shopping, remote working, and the digital economy.

Cross-Border M&A

Although Covid-19 restricted international travel in 2021, cross-border dealmaking was exceptionally robust over the course of the year, constituting 36% of overall global M&A volume. Global cross-border M&A grew nearly 70% relative to the level of activity in 2020, with a total of 17,661 transactions announced throughout the year. Notable cross-border deals included Square’s $29 billion acquisition of Afterpay, Rentokil’s $6.7 billion acquisition of Terminix, and Canadian Pacific’s $31 billion acquisition of Kansas City Southern.

We expect that the level of cross-border M&A activity in 2022 and beyond will depend on a variety of factors, including cultural, political and regulatory considerations, technical complexity inherent in cross-border deals, and the effects of recently implemented protectionist measures and foreign investment screening regimes (discussed below). Given these dynamics, prospective acquirors and targets evaluating cross-border opportunities will benefit from early and proactive planning regarding potential geopolitical and global economic and market risks.

SPACs

In 2021, SPAC volume continued the previous year’s scorching pace, with a total of 613 SPAC IPOs priced over the course of the year—a 147% increase compared to the 248 SPAC IPOs priced in 2020. That said, the number of priced SPAC IPOs and new SPAC IPO filings slowed significantly after the first quarter of 2021, due to increased scrutiny from the SEC and changing investor demand, including a tighter “PIPE” market. There were 298 SPAC IPOs priced in the first quarter, followed by just 64 in the second quarter, 88 in the third quarter, and a rebound to 163 in the fourth quarter. The number of new SPAC IPO filings similarly declined, with 469 new SPAC IPO filings made in the first quarter, as compared to 342 combined over the last three quarters of the year. A record number of de-SPAC transactions were also seen in 2021: a total of 289 such deals closed over the course of the year (97 in the first quarter, 70 in the second quarter, and 61 in each of the third and fourth quarters, respectively).

The explosion of SPAC activity triggered heightened regulatory scrutiny as federal agencies grappled with the more widespread use of these funding vehicles. Several notable enforcement actions were brought against SPACs, their sponsors, and/or target company executives. Additionally, the plaintiffs’ bar has begun to focus attention on SPACs’ public disclosures. The SEC also is considering the adequacy of the existing disclosure regime in relation to SPACs. The SEC is focused in particular on the use of financial projections by private targets going public through de-SPAC transactions—one key difference between de-SPAC transactions and traditional IPOs. In disclosing financial projections in de-SPAC transactions, practitioners have generally relied on a safe harbor in the Private Securities Litigation Reform Act (PSLRA) that permits existing public companies (within certain limits) to discuss projections. However, SEC officials have questioned the applicability of the PSLRA’s safe harbor to de-SPAC transactions, and public reports have indicated that new guidelines may be forthcoming. Further, to the extent that de-SPAC transactions involve stockholder votes and redemption rights, practitioners should carefully consider the robustness of disclosures in proxy statements, especially in light of the Delaware Court of Chancery’s recent decision in MultiPlan, which declined to dismiss a case alleging structural conflicts for SPAC directors and faulty proxy disclosure. Against this backdrop, de-SPAC transaction terms are continuing to evolve, and well-priced and marketed de-SPAC transactions are being completed.

Looking forward to 2022, SPACs will continue to be a fixture in the M&A environment and a driver of overall activity. There are approximately 575 SPACs with combined buying power of $779 billion (assuming an average target size of five times the size of the SPAC’s trust account) that currently are looking for targets and are highly incentivized to complete deals before the expiration of the time periods specified in their charters (generally 18 to 24 months). At the same time, headwinds—including greater regulatory attention and the possibility of stricter guidance, as well as increased litigation risk—may present new challenges for SPAC deals in the coming year, and should be carefully considered by SPACs and SPAC targets together with their advisors.

Evolving Antitrust Landscape

One of the most significant areas of development in M&A in 2021 was in antitrust, and the effects of this year’s developments will likely factor into dealmakers’ decisionmaking for years to come. New leadership appointed by the Biden administration at the FTC (including the appointment of Lina Khan as chair of the agency in June) and the DOJ (including the appointment of Jonathan Kanter as the top official at the DOJ’s Antitrust Division in November) have ushered in a new, more aggressive and unpredictable era of merger enforcement. As new leadership attempts to make their mark on the U.S. antitrust environment, parties should expect continued aggressive enforcement in 2022.

The federal agencies, in particular the FTC, have not shied away from updating policy priorities and changing existing practices. Procedural policy changes (some adopted by a divided FTC split along partisan lines) include (i) the “temporary” suspension of early termination of the initial waiting period for HSR filings, which was announced in February and remains in place with no indication of when or if the suspension will be lifted, (ii) the FTC’s new practice of sending standard form pre-consummation warning letters to merging parties alerting them that, notwithstanding the expiration of the statutory waiting period, the FTC’s investigation remains open, the agency may subsequently determine that the deal was unlawful, and companies that choose to proceed with transactions that have not been fully investigated are doing so “at their own risk,” and (iii) the FTC’s adoption of a policy requiring acquirors who settle merger enforcement actions to obtain prior approval from the FTC before closing transactions in the same or related relevant markets for a period of at least ten years. Substantive policy changes include the FTC’s new “holistic” approach that focuses on harms that “Americans are facing in their daily lives,” which now may consider novel issues beyond the traditional focus on anticompetitive effects (such as unions, wages, sustainability and diversity), potentially shifting existing antitrust doctrine away from the consumer welfare standard, as well as the FTC’s repeal of the 2020 vertical merger guidelines with the intent to adopt guidelines that better reflect “the skepticism the law demands.” Just this week, the FTC and DOJ announced the launch of a joint public inquiry to solicit input on ways to modernize their horizontal and vertical merger guidelines “to better detect and prevent illegal, anticompetitive deals in today’s modern markets,” an effort that the agencies hope to complete this year. These changes, among others, have complicated dealmaking by introducing greater uncertainty for merging parties, increasing unpredictability and the regulatory burden in the context of specific transactions as well as for future transactions companies may wish to pursue, and creating longer review periods.

Amidst robust M&A activity in 2021, the FTC and DOJ have investigated and challenged transactions in an array of industries. High profile enforcement actions included the DOJ’s challenge of Visa’s $5.3 billion acquisition of Plaid, which involved allegations that Plaid was “developing a payments platform that would challenge Visa’s monopoly” in online debit payments, and therefore the acquisition would “kill” a nascent competitor, and which the parties abandoned in early 2021, shortly after the DOJ’s challenge, the DOJ’s successful challenge to the $30 billion megadeal between insurance brokers Aon plc and Willis Towers Watson, which the parties abandoned in July 2021 after being unable to reach a settlement with the DOJ, the FTC’s pending challenges against two vertical mergers––NVIDIA’s $40 billion acquisition of Arm and Illumina’s $8 billion acquisition of Grail––two deals that are also under review in Europe, and the DOJ’s recent challenge to Penguin Random House’s $2.2 billion purchase of competitor Simon & Schuster, a deal that would combine two of the top five publishing companies in the U.S., and notably focuses on harm to authors (monopsony) rather than consumers (monopoly).

All indications point to an even more active enforcement environment in 2022. In particular, the agencies will continue to investigate and aggressively pursue vertical mergers and so-called “killer” acquisitions, in addition to traditional horizontal mergers. The DOJ may be increasingly active in shaking up previous policies as Jonathan Kanter settles into his new role.

Additionally, leaders of the FTC and the DOJ have expressed a commitment to working together to progress their priorities, making it likely that interagency coordination will increase in the year ahead. Finally, enhanced collaboration between U.S. regulatory agencies and their international counterparts, especially in industries such as technology, will create a tougher environment for competition enforcement.

Further complicating the regulatory landscape is the possibility that Congress will overhaul the current legislative framework in the near future. Various proposals pending in Congress range from burden shifting, outright bans on mergers involving companies over a certain size, modification of the standards used to evaluate mergers, and increased penalties for antitrust violations. State antitrust regimes may also be amended in the near future, exemplified by a sweeping antitrust bill recently reintroduced in the New York State legislature. While there is broad bipartisan commitment to altering the current antitrust regime, it remains unclear whether any of the pending antitrust bills have the requisite Congressional support.

We expect that regulatory headwinds will impact levels of M&A activity in 2022, both by strategic acquirors and by private equity firms (which historically have faced relatively more lenient antitrust review) as Biden administration officials continue working to implement the Administration’s aggressive antitrust agenda. One way parties will account for the uncertainty is through deal mechanics—including detailed regulatory commitments, more frequent reverse termination fees, longer outside dates, and potentially changes to the interim operating covenants that restrict the seller’s conduct of its business in the pre-closing period. The uncertainty and general environment of hostility underscore the importance of careful and early planning in consultation with legal and financial advisors, as well as proactive engagement with the agencies if issues may arise.

Foreign Investment Review

The impact of regulatory scrutiny of foreign investments has increased in the U.S. and in numerous jurisdictions around the world. In the U.S., review of foreign investments is conducted by the Committee on Foreign Investment in the U.S. (CFIUS), which is a federal interagency group tasked with assessing foreign investments in U.S. business and certain real estate transactions for national security implications. CFIUS’s mandate has expanded in recent years, most recently in 2018 with the passage of the Foreign Investment Risk Review Modernization Act (FIRRMA), which introduced mandatory notification requirements for certain transactions and expanded the jurisdiction of CFIUS review across various critical technology and infrastructure or sensitive data businesses.

In a trend that significantly accelerated during the Covid-19 pandemic, other countries are also bolstering their foreign investment review regimes. For example, the United Kingdom overhauled its foreign investment rules and implemented the National Security and Investment Act in early January 2022, France announced tightened restrictions on its foreign investment rules in September 2021, and China’s Measures for Security Review of Foreign Investment, which took effect in January 2021, provide for national security review similar to that of CFIUS.

Given increasing geopolitical tensions, in particular increasing tensions between the U.S. and China, advanced planning for foreign investment scrutiny—which, in some cases, will be a bigger driver of transaction timing than competition reviews—will be critical to timely and successful completion of cross-border deals.

ESG, Activism and M&A

ESG has continued to gain momentum as corporate boards, managements, shareholders, and other stakeholders assess and recognize the bottom-line implications of environmental, employee, social and governance considerations generally and in the context of the long-term value of the corporation. In the past year, ESG has played an increasingly prominent role in activist campaigns, most dramatically exemplified by Engine No. 1’s success in electing three directors to Exxon Mobil’s board, as well as by the development of the two-front activist “pincer” attack in which an ESG activist attack is followed by an attack from an activist focusing on financial returns. Activists have also leveraged ESG to further their M&A theses: Third Point called for the breakup of Royal Dutch Shell, Elliott called for the separation of SSE’s renewables business and Bluebell called on Glencore to divest its coal business.

ESG’s influence is also increasingly evident in the context of M&A negotiations and larger deal considerations. As one example, it has become ever more critical for acquirors to comprehensively diligence the ESG profile of potential targets—a result of the SEC’s increased focus on the adequacy of ESG disclosures and the growing legal, financial and reputational costs of ESG underperformance.

Climate change and related risks may also create M&A opportunities in the near term, as companies restructure operations in the face of investor pressure to reduce their emissions output. Relatedly, environmental considerations may factor into the regulatory review of proposed transactions by U.S. and other international regulatory bodies, as the FTC increasingly includes questions about sustainability in merger investigations and the U.K. CMA recently requested input on how the U.K. competition regime could better promote sustainability.

Finally, because of the importance of ESG performance to investors, companies should consider highlighting ESG-related synergies and opportunities in transaction rollouts, investor presentations, press releases and at analyst and investor meetings.

In addition, activism-driven M&A was an important part of the corporate landscape in 2021, and was often focused on sweetening or scuttling announced transactions, as exemplified by TCI’s campaign at Canadian National, in which TCI originally sought to thwart Canadian National’s interloping bid for Kansas City Southern (and is now involved in an ongoing proxy fight with the company). Numerous other 2021 campaigns were aimed at selling or breaking up target companies, including the sale of Columbia Property Trust to PIMCO following Arkhouse Partners’ public unsolicited takeover offer, the sale of W. R. Grace to 40 North after multiple unsolicited offers from 40 North, and Monmouth Real Estate Investment Corporation’s settlement with Blackwells Capital in connection with Monmouth’s $4 billion acquisition by Industrial Logistics Properties Trust, to name a few prominent examples. Relatedly, prospective buyers must also remember that proxy advisors can affect the success of transactions, exemplified by the termination of Zoom’s proposed acquisition of Five9, Inc. after ISS recommended against the merger and the deal failed to receive the requisite shareholder support.

Looking forward to 2022, we expect that activist activity will continue to remain elevated, with activists pursuing various tactics including pushing for break-ups and challenging announced deals (including using ESG deficiencies to help garner investor support). In addition, activists are likely to continue launching proxy fights to gain board seats, with the dynamics regarding these contests changing in light of the SEC’s adoption, in November 2021, of final rules requiring parties in contested elections to use universal proxy cards that include all director nominees presented for election at shareholder meetings, which facilitates mixed ballot voting and therefore will increase the likelihood that the activist will obtain at least one board seat in a contested election.

Acquisition Financing

The record-breaking debt financing markets in 2021 helped drive a year of robust deal-making activity. Acquirors, whether investment grade, high-yield, or sponsor-backed, and across industries, had strong access to financing commitments with favorable terms, which were followed by permanent financing take-out deals that were often significantly oversubscribed.

New issuance volumes for both high-yield bonds and loans set full-year records before Thanksgiving, and those record high volumes were accompanied by record low yields. Investment grade bond issuance levels were the second highest on record, eclipsed only by levels reached in 2020.

The attractive financing available in 2021 supported dealmaking at an all-time record pace, including M&A transactions such as Salesforce.com’s $27.7 billion acquisition of Slack, Jazz Pharmaceuticals’ $7.2 billion acquisition of GW Pharmaceuticals, II-VI’s $7.0 billion acquisition of Coherent, IAC’s $2.7 billion acquisition of Meredith Corporation’s National Media Group, Herman Miller’s $1.8 billion acquisition of Knoll, and Siris Capital’s innovative $1.5 billion double-acquisition of Equiniti Group and American Stock Transfer & Trust Company. The financing markets also supported other types of M&A activity, including spin-offs such as XPO Logistics’ $7.8 billion spin of GXO Logistics, and “Reverse Morris Trust” transactions such as the $9.3 billion combination of 3M’s food safety business with Neogen.

Refinancings were fast and frequent as well, and companies in sectors that faced headwinds at the initial peak of the Covid-19 crisis, including Expedia and Gap, reset their capital structures on enviable terms. As central banks begin to taper monetary easing measures taken during the height of the Covid-19 pandemic, potential acquirors should closely monitor the impact of these changes on the financing landscape. But so far, even as monetary authorities have signaled that their support for the economy will begin to be curtailed, debt markets remain open and constructive.

As always, a new year brings its own challenges and considerations, including the possibility of new and disruptive Covid-19 developments and ongoing inflationary pressures. In this environment, borrowers seeking acquisition financing commitments must remain alert and prepared. Provisions in merger agreements allocating financing failure risk remain an important area of focus. Likewise, it remains critical for corporate acquirors to model downside cases, and to understand the “flex” and other terms that could make a debt commitment ultimately less appealing to them by the time their deal closes. On one hand, high-grade borrowers may find that traditional financing sources (i.e., capital markets deals and bank loans arranged by major banks) remain their best paths to execution. Leveraged borrowers, on the other hand, may continue to find it useful to consider alternative financing paths and sources to reach a deal, as funding will be driven, in part, by factors such as the availability of direct lending and enhanced covenant flexibility.

Delaware Developments

Delaware M&A litigation in 2021 largely maintained the status quo. In 2020, the Delaware courts were presented with a number of Covid-19 “material adverse effect” and other disputes concerning M&A agreements that had been entered into before the onset of, and then pressured by, Covid-19 and its effects. Many of these disputes were resolved (in some cases through price adjustments) before the courts adjudicated on the merits (including Simon/Taubman and LVMH/Tiffany’s). As the pandemic progressed, market participants quickly became focused on how to address Covid-19-related issues in MAE definitions and related provisions of transaction agreements, with new “market standard” provisions developing regarding carveouts for Covid-19, and suggestions that there might, for the first time, be a wave of Delaware court cases excusing buyers from closing on the basis of MAEs proving unfounded. Indeed, the bar for any finding of an MAE has remained fixed at a very high level, as attention has also focused on provisions addressing compliance with interim operating covenants, with parties paying careful attention to how actions taken in response to Covid-19 are treated under these covenants, which has been another area of recent litigation.

* * * * * * * *

This past year’s M&A boom will be difficult to beat, but we expect that the fast pace of dealmaking activity will continue at least for the first part of 2022, and possibly beyond, as shareholders demand that companies focus on core businesses and grow those businesses sometimes faster than their organic capabilities permit and companies leverage transformative transactions, both buying and selling, to meet those demands and remain competitive. While dealmakers may face headwinds—including aggressive antitrust enforcement (both in the U.S. and globally), a scarcity of attractive targets, and the prospect of increasing interest rates—there are many conditions heading into the new year that are conducive to M&A, including large amounts of dry powder amassed by private equity firms and by SPACs seeking targets, as well as the need to innovate to keep pace with technological advances. Dealmakers should continue to carefully analyze the risks and benefits of potential M&A transactions, taking into account the financial and strategic rationales for the deal, and thoughtfully structure transactions to maximize the potential for successful outcomes.