Belgian mergers and acquisitions market peaks, but future is uncertain

In line with the international M&A market, Belgian acquisition activity recovered strongly in 2021, especially for large transactions and acquisitions by private equity players. The average price paid for a transaction is once again reaching a record high. ESG measures do not yet play a significant role in Belgium with regard to pricing or deal structure. And the high level of geopolitical uncertainty combined with inflation and disrupted supply chains make predictions for 2022 difficult.

These are the main conclusions of the ninth edition of the M&A Monitor, an annual survey of just under 200 Belgian merger and acquisition specialists including corporate finance advisers, private equity investors, strategic advisers, bankers and lawyers. They represent all industries and transaction sizes. The survey asks about their experiences of the deals they were involved in during 2021 on the one hand, and their expectations for 2022 on the other.

The study was conducted by Professor Mathieu Luypaert and researcher Gianni Spolverato of the Centre for Mergers, Acquisitions & Buyouts at Vlerick Business School in collaboration with Bank J.Van Breda & Co., BDO, Van Olmen & Wynant, and Sowalfin Transmission.

Belgian mergers and acquisitions market peaks, but future is uncertain

Professor Mathieu Luypaert shares the results of the 2022 M&A Monitor, an annual survey of Belgian M&A specialists about their experiences with the deals they were involved in during 2021, and their expectations for 2022.

Acquisitions market booming like never before

After the global M&A market took a significant dive as a result of Covid-19, 2021 not only saw a recovery but also an unprecedented peak both in terms of the number of transactions and the amounts paid. A total of nearly $6 trillion was spent globally, far above the record years of 2007 and 2015.

The Belgian mergers and acquisitions market also picked up again in 2021. 73% of the experts surveyed stated that the takeover activity increased in 2021, and for 1 in 4 the increase even exceeded 20%. The growth is strongest in the large acquisition deals segment (more than €100 million), whereby 37% of the respondents indicate growth of 20% or more. Private equity players also show significant growth: 42% of them saw an increase in transactions of more than 20% in 2021.

Mathieu Luypaert, Professor of Corporate Finance at Vlerick Business School, sees two explanations for this: “On the one hand, 2021 saw strong economic growth, with a demand that was many times greater than the supply in some sectors, such as construction and tech. On the other, the monetary policy pursued ensured that both private equity companies and strategic buyers have built up cash reserves as a liquidity buffer. This cash, combined with low interest rates in 2021, found its way back into the economy through acquisitions.”

For 2022, the predictions of the surveyed experts on the evolution of the M&A market are rather mixed. “A number of external factors such as geopolitical tensions, problems in the supply chain, high inflation and rising interest rates are causing a great deal of uncertainty. The question is therefore to what extent this uncertainty is balanced by the enormous amounts of cash that are still available. Especially in the largest deal segment, where multinationals and international deals are often involved.”

Valuations up again

In 2021, a record level of 6.7 times the EBITDA value (i.e. the operating cash flow) was paid for the acquisition of a company across all size segments, a slight increase compared to 2020 (6.4).

• In the smaller segment of deals with a value of less than €1 million, the multiple is 4.5; for deals above €100 million, up to 9.9 times the EBITDA value was paid.
• The pharmaceutical sector remains the frontrunner (9.4), followed by technology (8.7) and healthcare (8.4). At the bottom of the list, we find transport and logistics, retail and construction.

Professor Mathieu Luypaert: “If buyers still wish to create value through a takeover, the multiples cannot get much higher. The larger the company, the higher the value. Large companies are considered to be less risky and more stable. In addition, there are often more interested buyers and also larger buyers with more money. Finally, large companies often offer more opportunities for synergy.”

Sustainability not yet high on the agenda

Although the business world is increasingly focusing on ESG, as yet this is not being translated into mergers and acquisitions. ESG factors are only taken into account in 35% of all strategic acquisitions. And although private equity players do better at 49%, only 38% of them have a formal ESG investment policy that explicitly stipulates whether or not to invest in certain industries or only to select target companies that score well on ESG standards. Finally, the study shows that the environmental component of ESG is primarily taken into account in ESG analyses, rather than ‘Social’ and ‘Governance’.

Mathieu Luypaert: “Although international studies show that 6 in 10 private equity players have a formal ESG policy, this is still rather lacking in Belgium. When the ESG performance of potential targets is indeed taken into account, this mainly has an impact on the decision as to whether or not to invest. Reputational risks or value creation are not yet taken into account to a significant extent. However, given that banks will become more demanding in the future with regard to ESG reporting as a prerequisite for obtaining funding, in the near future we can expect the ESG performance of potential targets to gain in importance for pricing and funding purposes.”

Acquisition motives and deal structures

Economies of scale remain the main motive for an acquisition. In specific sectors such as technology, streaming and gaming, this search for a position as a market leader has even led to the clustering of mega-deals. Access to knowledge and talent is also gaining in importance, especially given the shortages on the labour market. The ability to use each other's distribution channels and, by association, access to new and foreign markets also became more important in 2021. For private equity players specifically, growth remains the main reason for an acquisition.

In terms of financing, the use of deferred payment mechanisms such as vendor loans (38%) and earnouts (30%) fell back to normal levels. And in the case of acquisitions in sectors such as entertainment and retail, banks are less inclined to grant a loan.