According to the Financial Times, global dealmaking suffered a record decline during the second half of 2022, bringing to an end the boom sparked by Covid-19. Mergers and acquisitions worth $2.2tn were announced in the first half of 2022, with this value dropping to $1.4tn in the second half. This represents the largest divergence since 1980.
However, not all is lost. Refinitiv believes the US 'may just prove the exception', and though they are pessimistic about Europe's prospects, CMS and Mergermarket disagree. Meanwhile, Goldman Sachs highlights 'a complex but optimistic outlook for dealmaking'. In this context, this article explores the factors behind the decline in M&A and seeks to demonstrate that things are not as disastrous as we might be led to believe.
From the FT article we can draw out four main factors that explain the drop in dealmaking.
Firstly, the dramatic increase in interest rates caused by the Ukraine war and rising inflation, which have decreased confidence in global markets and raised financing costs, bringing to an end the era of cheap money.
Junk bond markets have also played a role. These have been stagnant as investors found refuge in safe assets, causing private equity firms to encounter difficulties in funding deals. On a recent podcast, Goldman Sachs' co-heads of Global M&A agreed, emphasising the 'tremendous slowdown' in private equity's usual 30-40% stake of the M&A market and 'the inability of private equity to get [the] attractive financing they had benefitted from...for many years'. This is partly because of the unwillingness of banks to issue debt, given their inability to syndicate it amid weak investor sentiment (as demonstrated, for example, in Elon Musk's recent acquisition of Twitter).
The war in Ukraine is another factor, reflecting reports from as early as March 2022 that global dealmaking had declined 29% year-on-year in the first quarter as a result of the conflict. Things worsened as the war continued. In April, Forbes announced that at least 100 companies had postponed or pulled financing deals worth more than $45 billion since the Russian invasion. The impact of the war has been twofold. Not only have companies distanced themselves from the Russian market, the world's ninth largest economy, but the war has sparked volatility. For example, the CBOE Volatility Index rose above 30 when Russia invaded Ukraine (its average usually sitting around 21). Such fears were compounded by the interest rates hikes introduced to counter inflation, as the conflict caused food and energy prices to soar.
Finally, dealmakers have faced challenges from increasingly assertive antitrust regulators, especially in the US. As well as private equity (as Timothy Ang has discussed on this Blog before), the Biden administration has set its sights on Big Tech. For example, in December the Federal Trade Commission sued to block Microsoft's $68bn acquisition of Activision Blizzard, arguing that the deal 'would enable Microsoft to suppress competitors to its Xbox gaming consoles and its rapidly growing subscription content and cloud-gaming business'. In preliminary reports, the CMA has also expressed its concerns, deciding the deal merits further investigation.
Markets are subject to peaks and troughs, and in 2021 global M&A rocketed to the highest levels on record. To some extent, then, the decline in M&A was an inevitability. In the words of Stephen Arcano (Global Head of Skadden's Transactions Practices), '2021 really was an exceptional year, you can’t have record years every year'.
Whilst dealmaking may have declined by 39% in the US and Europe and 33% in the Asia Pacific region from 2021 levels, the volume of global M&A in 2022 still trumped that of 2020. Particular bright spots include sport M&A, which for many is in a 'golden age'. For example, 2022 saw the sale of Chelsea FC and AC Milan, the NFL's Denver Broncos, and the NBA's Phoenix Suns and Mercury basketball teams.
Further, when reviewing the graph below, it is clear that the spike in 2021 levels was truly unprecedented, and inevitably due to fall back to more natural levels at some point. The volume of M&A in 2022 was therefore certainly not unusual, in relation to the years preceding 2021 - and perhaps, the decline just appears more drastic given the highs of 2021.
Looking towards the Future
Nevertheless, opinions differ on the trajectory of the M&A market in 2023.
On the whole, there appears to be a general sense of positivity. Alison Harding-Jones (Head of M&A for Europe, the Middle East, and Africa at Citigroup) predicts that in 2023 dealmaking will prosper once more, but through an influx of ‘high quality strategic transactions' driven 'primarily by corporate activity', as private equity groups take longer to deploy their funds. Others are less optimistic about the prospect of immediate growth, such as Eric Swedenburg, partner at Simpson Thacher: 'At some point during the year…we’ll start building up again…It won’t be right out of the gate in January'.
At the far end of the scale sits Refinitiv, which has characterised the US as the 'one bright spot' in an otherwise desperate market. It sees ‘tentative signs of a plateau or better’, with the country’s final quarter value recovering 23% in the last three months of 2022. However, Refinitiv is clear that ‘no such glimmers of hope are visible in Europe’, on the basis that Europe has experienced the most withdrawn M&A (43% of failed deals involving a European target, the worst figure since 2008); and that in the last quarter of 2022, deal values decreased by 41% compared to the preceding three months.
One can only hope that institutions such as Goldman Sachs are correct that the outlook is 'complex but optimistic'. Alongside PwC, Goldman predicts that 'financing is going to come back - it's just a question of when'. It also emphasises that the corporate drivers of M&A, beyond the financing and macroeconomic difficulties, remain strong - such as digitisation, ESG, simplification, and private capital liquidity.
Ultimately, of course, such institutions are likely to be positive, with M&A operating within long-term cycles whereby repositioning and volatility forces investment back into the market, for those institutions to help finance. Not only is market volatility necessary, but it is something that financial institutions are well-accustomed to experiencing and well-equipped to handle. It follows that perhaps the general sense of positivity is not actually too far misplaced.
Fortunately, it appears that not all is lost with the M&A market. Whilst the market has certainly been subject to a decided decline, thanks to a combination of influencing factors, the long-term trajectory of M&A seems to be one in which people can take some comfort. Indeed, if history is anything to go by, it does not appear that ‘no…glimmers of hope are visible’. The market should rejuvenate.