Publish Date

Jul 14, 2022

Global Guide to M&A Tax, 2022 Edition

A&M Tax Advisor Update


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.

Another key factor that will likely affect the M&A ecosystem, whether in 2022 or 2023, is the increase in interest rates by Central Banks. For years, dealmakers have had the luxury of access to cheap cash. If there are only a few rate hikes and inflation starts to come under control, perhaps it is not the “speed bump” or wall that many think it may become. Further, with the dramatic drop in the value of public equities – currently, for the year, the Nasdaq composite index is down roughly 29% and the S&P 500 index is down roughly 19.74%, perhaps public corporate acquirors will be the most affected from a deal perspective as their stock is worth less as currency for deals. As the overall economy grapples with a declining public equities market, inflation, conflicts across the globe, interest rate hikes, supply chain disruptions, increasing energy and labor prices, investors will be keen to search out the best available returns. According to McKinsey’s latest private markets report, PE funds have outperformed most of their public market counterparts since 2009. In 2021, PE activity generated an IRR of 27%, the highest among all private asset classes. According to a Limited Partner (“LP”) survey put out by Prequin in Q4 of last year, 95% of the LPs who responded said that the performance of their PE portfolios met or exceeded their expectations in the past year notwithstanding a prediction of some cooling in 2022. Nearly 90% of those LPs said that they expect to increase or maintain their PE allocations this year, and 95% said they will do so over the long run.

A few more figures to digest. According to Dealogic data, the value of global M&A activity was down in Q1 of 2022 by 29%, when compared to Q1 of 2021. Moreover, deal volumes dropped to USD1.01 trillion from roughly USD1.4 trillion in Q1 of 2021. There was also a 29% drop in cross border deals. Notwithstanding all the challenges in the market, PE transactions remained relatively strong in Q1. There were 13 PE transactions worth more than USD10 billion, compared to 12 from Q1 of last year. In terms of total volume, PE transactions accounted for roughly $USD204.5 billion in Q1. In 2021, the total value of M&A came in at USD5.9 trillion, up from USD3.7 trillion in 2020, according to the Bain Consulting report.

Regardless of the macroeconomic factors mentioned above, dealmakers appear relatively optimistic on the level of activity for 2022 and appear to be taking into account at least the following:

  • Private Equity Dry Powder: High levels of dry powder available to buyout funds will continue to contribute to a push for global M&A. Estimates from Preqin suggest that the global PE industry recorded roughly USD1.78 trillion of dry powder in February. With such cash hoards, funds should be well-positioned for the foreseeable future in M&A even in the face of rising interest rates. If dealmakers fear that a recession or worse is on the horizon for 2023 and try to exit beforehand, 2022 could shape up to be a very active year for deals.
  • Special Purpose Acquisition Companies (“SPACs”) or “Blank Check” Companies: SPACs have been in existence in one form or another since the 1980s. Simply defined, a SPAC is a non-operating publicly listed company the sole purpose of which is to identify and purchase one or more private companies. It is an alternative to the IPO route traditionally taken by private companies. In 2021, according to data from SPACInsider, the market witnessed an explosion of IPO value raised in Q1 – 314 listings raising just north of USD100 billion. The following three quarters saw 367 listings totaling roughly USD72 billion. Q4 was still respectable showing 179 SPAC IPOs raising roughly USD35 billion whereas Q3 had 104 SPAC IPOs raising roughly USD20 billion. By the end of Q1 2022, there were roughly 600 SPACs out looking for deals. While the US remains the leader on the SPAC front, a number of European exchanges and regulators have started looking at their listing rules in an effort to become more competitive by attracting such companies. SPAC IPOs in 2021 represented roughly 9% of the European volume. That figure is expected to grow significantly over the next few years. As the popularity of SPACs grow, this should provide an additional source of funds helping to facilitate transactions either with sponsors exiting portfolio companies or the purchase of private companies looking to go public without the hassles of the traditional IPO route.
  • Shareholder Activism: Over the last decade, shareholder activists have forced spin-offs or other divestitures of non-core assets, requiring companies to focus on their strengths and create more nimble and flexible models to gain competitive advantages. With the Tax Cuts and Jobs Act of 2017, US tax reform made taxable dispositions of assets, as opposed to tax free spin-offs, less burdensome and, therefore, more attractive in many cases for US multinationals than they have been historically. Further, current macroeconomic factors may very well spur activists to push for divestitures. For example, several multinational companies have recently hurried to leave Russia while staying on the sidelines from an M&A perspective. Activist investors pressured boards to enter sales scenarios or break-ups in order to unlock value for investors at the very moment when public market valuations are severely depressed. In any event, shareholder activism should continue to drive M&A opportunities.

This edition of the Taxand Global Guide to M&A Tax has been designed as a desktop reference guide to span the continents. Providing an “at a glance” insight into the tax treatment of mergers and acquisitions globally. It is intended to provide a basic introduction to the tax rules which have a bearing on M&A transactions in each of the fiscal environments within its scope and to facilitate understanding and conversation between global M&A team members. It should be viewed as a resource (rather than an encyclopedia) to help those working on international transactions to find common ground and mutual understanding. National Taxand teams in each of the covered jurisdictions made essential and invaluable contributions to our Guide and we are most grateful for their participation and support in this project. We are pleased to offer to you this volume, as an example of the benefits that cross-border cooperation and collaboration can provide.