Global M&A markets gave both optimists and pessimists plenty to talk about in the first quarter of the year. The “glass half full” view is that deal activity fared far better than many had expected, given the current geopolitical and macroeconomic conditions facing dealmakers. The more pessimistic perspective points to substantial year-on-year declines coupled with economic and regulatory factors (in the US at least) making things increasingly challenging for deal makers.
Either way, there is no denying that the year had a relatively slow start, after global M&A markets began to lose steam through 2022. There were 5,974 deals in Q1 2023, a year-on-year decline of 29% and the lowest quarterly tally since Q3 2020—though it's important to note that this is still higher than any quarter on Mergermarket record pre-2020, before the pandemic and ensuing fiscal and monetary stimulus distorted market activity. It’s also important to remember that 2021 and 2022 were both unprecedented record-breaking years for M&A activity.
Aggregate global M&A value in Q1 this year came to US$646.3 billion, an even steeper annual decline (40%) than was seen on a volume basis. This is the lowest figure since the depths of the pandemic and falls below any quarterly total going back to Q1 2016.
Cash is king amid today’s tough financing conditions. Pfizer proved that with its US$43 billion acquisition of cancer drugmaker Seagen in March, the largest acquisition of Q1 2023 and the biggest for the biotech sector since AbbVie's takeover of Allergan dating back to 2019. Merck was already sizing up Seagen in the summer of 2022 but walked away after failing to agree on a mutually acceptable price. Pfizer’s balance sheet is awash in cash due to its highly profitable COVID-19 vaccine sales and the company was able to use this abundance to top up the US$31 billion in new long-term debt used to finance the deal.
The second- and third-largest deals announced in Q1 were US gold mining company Newmont’s US$19.5 billion offer for Australian equal Newcrest Mining, followed by the US$15.2 billion buyout of Tokyo-based conglomerate Toshiba by a group led by private equity firm Japan Industrial Partners.
Regulatory hesitation in US M&A
On its analyst and investor call announcing the Pfizer/Seagen deal, concerns were expressed about the close regulatory scrutiny that was to be expected due to the deal’s size. The reverse termination fee—which came to approximately 5% of the total deal value, above the standard 3% break fee—offers a clue into the company’s antitrust concerns.
This comes as US dealmakers eagerly await an update on the proposed new merger guidelines being developed jointly by the Department of Justice Antitrust Division (DOJ) and the Federal Trade Commission (FTC). The rules have been highly anticipated since a public consultation period was announced in January 2022. Uncertainty around the guidelines appears to be weighing on market confidence.
In the US, year-on-year M&A volume was down 10% to 8,468 deals in 2022, while value fell by 38% to US$1.6 trillion, lagging the global average on both counts. That gap narrowed in the first quarter, with 1,816 transactions valued at US$290.6 billion, representing annual falls of 31% and 42%, respectively.
However, the number of mergers seeking US antitrust approval dropped significantly in March, and experts suggest that this may be due to a lack of regulatory certainty. In that month US antitrust authorities received 122 Hart-Scott-Rodino (HSR) filings, according to preliminary FTC figures. The period following the onset of the pandemic in 2020 notwithstanding, this is the lowest monthly filing figure in more than eight years.
HSR filings are mandatory for M&A deals above a certain threshold in the US and are designed to allow the government to review the proposed transaction for potential antitrust violations before it takes place. The HSR filing requires detailed information about the companies involved, including their financials, competitive positions and markets served. The filing also triggers a waiting period, during which the government has time to review the proposed transaction and decide whether to block it or require conditions to be met.
The eagerly awaited merger guidelines were developed after the FTC withdrew vertical merger guidelines in September 2021, leaving a void. Since then, both the FTC and DOJ have dramatically increased investigations and enforcement actions. The new guidelines are expected to tip the legal scales further in favor of enforcers but will at least bring some much-needed clarity.
Antitrust advisors are being forced to ask new questions of companies, including how the transaction will impact workers and whether the parties are important buyers of a product. They expect the new guidance to reinforce the FTC's 2022 policy statement about Section 5 of the FTC Act, which takes a newly expansive view of the statute broadly prohibiting unfair methods of competition. They are also likely to hold on to provisions that tend to favor the government in litigation, such as presumptions based on market share. Notably, a unified set of guidelines is also expected to reflect the fact that the agencies will take a stricter view of vertical mergers than has been the case historically, a view supported by an uptick in investigations involving companies at various points in the supply chain over the past 18 months.
As the US represents more than two-thirds of global M&A value, greater clarity will give acquirers the confidence necessary to pursue US deals, even if it’s within a more restrictive regulatory framework. Uncertainty will be one less aspect to consider amid what remain challenging macro and M&A market conditions.