After the global M&A market recorded its hottest year of the century in 2021, 2022 still shows signs of further heating up.

Corporate dealmakers said in a KPMG survey that economic growth rebounding, low interest rates, and ample investment capital will push total U.S. deal volume for the full year above the $2.9 trillion recorded from January to mid-November 2021. A survey of 336 CEOs by EY last month found that three in five U.S. CEOs plan to pursue M&A in 2022.

"The deal boom has reached a fever pitch, and it feels like it will continue for the foreseeable future," Mustafa Hadi, managing director at Berkeley Research Group (BRG), said in an interview.

Deal experts point out that CFOs can outperform competitors and negotiate promising deals by following a set of best practices, including aligning M&A with business strategy, keeping deals simple, ensuring a good cultural fit, and starting integration of acquired companies early.

Several forces could drive M&A activity this year.

Duncan Smithson, senior director of M&A at Willis Towers Watson, said CFOs' increased focus on environmental, social, and governance (ESG) priorities will spur deal activity, including divestitures, as companies seek to reduce carbon emissions or undertake innovative initiatives to curb climate risk.

EY said one in four U.S. CEOs plans deals in 2022 aimed at improving sustainability footprints and enhancing ESG capabilities.

CFO Dive, data from Refinitiv

Pandemic-induced forces could drive M&A well into this year, Smithson said in an interview. Lockdowns and the tightest labor market in decades have forced companies to seek acquisitions that can add critical capabilities.

The hybrid work trend has accelerated the pace and scale of digital transformation and intensified competition for technical experts such as those in cybersecurity and software engineering, Smithson said. Companies may acquire firms that enhance self-sufficiency and reduce risks of disruptions such as supply chain bottlenecks, social unrest, cyberattacks, and severe weather, he said.

The COVID-19 pandemic weakened revenues at thousands of businesses in hospitality, entertainment, brick-and-mortar retail, and other customer-facing industries, creating opportunities for dealmakers to snap up distressed companies.

"One of the things that really matters to us coming out of the pandemic is rapid growth and rapid expansion," said John Meloun, CFO of Xponential Fitness, a publicly traded boutique fitness company with 10 brands operating 2,100 studios across 10 countries.

"A lot of fitness providers have disappeared, so there is a lot of white space where you can move quickly by opening studios faster," Meloun said in an interview.

Headwinds to deals

Of course, CFOs and M&A experts say several factors could slow deal activity this year, including inflation, geopolitical tensions, the withdrawal of central bank stimulus, the complexity of transacting quality assets, and stricter regulation in sectors such as technology.

CFOs and M&A experts say potential buyers may hold back when acquisition targets in hot sectors such as technology, energy, financial services, and healthcare demand higher purchase prices.

"Valuations are just ridiculously high," said Adriana Carpenter, CFO of Emburse, a company providing expense and accounts payable management software. "There is a lot of investor money chasing too few assets."

At the same time, many CFOs feel pressure to seize the opportunity of loose money and complete acquisitions before credit becomes too tight, Carpenter said in an interview. They need to "be careful not to get into bidding wars."

CFOs and M&A experts say dealmakers should keep eight principles in mind when transacting this year, including:

1. Align M&A with business strategy

CFOs and deal experts say companies that make acquisitions without first aligning plans with business strategy are on a rocky road. An acquisition may look attractive on its own but may not fit in a way that advances company goals.

"At the end of the day, we have one idea, and that is our end customer," said Brian Fitzgerald, CFO of World Insurance Associates, an insurance brokerage that acquired 42 companies in 2020 and 50 last year.

"When we look at potential targets, it is always with the mindset: 'What talent, resources, and tools can these potential targets provide that we can introduce to our clients?'" he said.

Carpenter said Emburse completed a "transformational" acquisition of mobile travel platform Roadmap last year to promote sustainability, expand its technology stack and geographic reach, and advance its mission of "humanizing work." Roadmap enables companies to centralize travel booking and provides employees with features such as flight updates, safety alerts, destination tips, and carbon emission data. Employers can also track spending trends to better adjust travel policies.

"It was a very successful acquisition," Carpenter said.

2. Build a comprehensive M&A team

CFOs and deal experts say companies hoping to win in fierce competition and handle the many complexities of today's deals need to invest heavily in deal resources and expertise.

"We have really reached an inflection point in terms of the complexity and challenges of successfully completing deals," Smithson said. "Companies that do well are investing heavily in building their M&A capabilities."

CFOs and M&A experts say M&A teams should cover all company functions, from product engineering, marketing, and sales to tax, accounting, and human resources.

Leadership is critical—from due diligence to integration of the target company—to avoid omissions and misunderstandings, Carpenter said. "What I often see is people talking but no one listening, and they are not saying the most important things."

3. Keep it simple

CFOs and M&A experts say unnecessary complexity can stall and derail deals.

"Overly complex deals open the door to disagreements and 'frustrate both sides,'" Meloun said. "You can negotiate forever and end up just paying a lot of legal fees."

Xponential Fitness typically avoids the complexity of acquiring companies that require extensive investor approvals, he said.

"When there are only one or two founders, you can sit at the table on a Saturday, hammer out a bunch of terms, and everyone feels good," Meloun said. "But when there are 15 people and private equity involved, complexity reaches a frustrating level."

4. Beware of 'big bang' acquisitions

McKinsey notes that across a wide range of industries, companies that systematically and regularly acquire companies—rather than pursuing "big bang" acquisitions or growing "organically" without M&A—can deliver the greatest deal returns to shareholders.

"A carefully orchestrated series of deals around a specific business case or M&A theme—rather than relying on episodic 'big bang' transactions—is more likely to lead to stronger performance and lower risk than other approaches," McKinsey said. "Companies that regularly and systematically pursue mid-sized M&A opportunities deliver better shareholder returns than those that do not."

Companies following "programmatic" M&A have a 65% chance of outperforming peers, while those acquiring companies with a market value equal to or greater than 30% of their own have only about a 50% chance of success, McKinsey said.

"You have to be more cautious about large acquisitions because you are deploying a lot of capital and resources immediately, whereas smaller acquisitions allow you to modulate growth and resource commitments," Meloun said.

5. Address issues immediately

CFOs and M&A experts say acquiring CFOs rushing to close deals may decide to postpone addressing seemingly minor issues at target companies that could be easily resolved after closing, including ESG-related topics. That is a mistake.

"During the due diligence process, you can only truly understand a problem by trying to solve it," Carpenter said. "You may think a problem is small, but it could blow up in front of you."

6. Define revenue growth early

CFOs and M&A experts say many M&A deals fail when buyers overestimate their ability to drive revenue growth at newly acquired companies.

"One of the worst things I have seen is people thinking they can turn around the revenue line when what they are really good at is turning around the cost burden," said Kevin Hagon, director at BRG.

"As a CFO, you can identify synergies, redundancies, and indeed save money," Hagon said in an interview. But boosting revenue is much harder, depending on complex factors such as competitive strength, product development, and market fundamentals.

Fitzgerald said World Insurance avoids considering acquisitions of any brokerage showing signs of weak growth in its business book.

"Most people might optimistically think, 'It is fine, I can get it growing right away,'" he said. "Others might say, 'This is a clear sign that leadership may be at a stage in their careers where they no longer want to keep fighting—they are just coasting.'"

"You reach a point where you see some of these signs and can exit very early," he said. "You do not even need to get deeply involved in due diligence."

7. Ensure a good cultural fit

CFOs and M&A experts say even the strongest profit growth cannot save a merger of two conflicting corporate cultures.

"The reason most M&A fails is because of not focusing on the culture of the target and the acquiring company," Fitzgerald said. "If the culture is not in place, things start to go off the rails."

Founders of companies may initially welcome the acquirer taking over back-office operations such as accounting, finance, and human resources, he said. "Most sellers will say, 'Great, take the administrative stuff away from me because I just want to go out and sell and deal with clients.'"

But some sellers who have run businesses for decades may resist any loss of autonomy, Fitzgerald and Meloun said. CFOs need to maintain control without stifling the vitality of the acquired company, Fitzgerald said. "It is a balance."

8. Start integration early

CFOs and M&A experts say acquirers should explore the specifics of integration during due diligence, rather than waiting until the deal closes.

"Delaying integration steps until later in the merger, when you have more time, only adds to post-close complexity," Carpenter said. "Employees should immediately join the new corporate entity."

As part of its business model, Worldwide Insurance conducts due diligence with the goal of fully integrating target companies within 90 days, Fitzgerald said.

"As soon as due diligence starts, we ask: 'Do we see anything that could affect our integration process?'" he said. "We provide integration at the moment we exchange funds."

The turbulence of the pandemic economy makes now a good time for CFOs at some companies to do deals, M&A experts say.

Meloun said Xponential Fitness is expanding in the U.S. market, where about 20% of boutique fitness companies have closed since the COVID-19 pandemic began. The company, which offers guided workouts from yoga and dance to rowing and boxing, opened 240 U.S. studios in 2020 and more than 230 last year. It acquired one specialty fitness company in each of 2020 and 2021.

The lockdowns of the past few months have emptied the fitness industry, providing Xponential with "an opportunity to bring our brands into retail centers fairly quickly and obtain leases more favorable than before the pandemic," Meloun said.