Following a record-breaking year for dealmaking, 2022 has had a relatively slow start. A total of 4,947 deals worth US$984 billion changed hands during the first quarter—down 25% in value compared to Q1 2021, while the number of transactions dropped by 27%.
While failing to reach the heights of 2021, where deal value topped US$1 trillion in each quarter for the first time ever, dealmaking in the first quarter can be viewed as a normalization of activity—more in line with pre-pandemic levels of activity following an unprecedented spike in the market in 2021.
The decrease in activity extended to the top end of the market; there were 31 deals valued at over US$5 billion each announced in the first quarter. This is a significant reduction from the 48 deals announced within this price bracket in Q1 2021.
Gaming sector serves up bumper deals
After a record 2021, global technology, media, and telecom (TMT) dealmaking had another characteristically strong start to the year. With a total of 1,533 deals valued at US$359.1 billion announced, TMT continued to be the most active sector for dealmaking—in terms of both value and volume.
Signaling its dominance, the sector attracted five of the top ten deals of the year so far. This includes the highest valued deal of the first quarter—Microsoft’s US$75.1 billion takeover of videogame maker Activision Blizzard.
In particular, the software and media subsectors saw a year-on-year increase in deal total deal value. Software M&A value rose 34% from Q1 2021 to US$254.5 billion in the first three months of this year, while media deal value more than doubled from US$12.7 billion to US$35.1 billion.
The rise in software deal value could be attributed in part to Activision deal—Microsoft’s largest on record. The transaction is part of Microsoft’s aim to develop immersive virtual worlds, or “metaverse platforms,” which Big Tech firms widely view as part of the next evolution of the internet.
Closer to home
Although the COVID-19 pandemic has negatively impacted the gaming industry due to production delays for consoles (particularly as a result of the global shortage of semiconductors), the industry has weathered the pandemic better than many others. Like other home-based entertainment, gaming was boosted by lockdown orders.
The Activision deal is set to shake-up the balance of the power in the global gaming industry. A dealmaking frenzy is predicted as tech firms scramble to gain dominance in this fast-moving space.
Dealmaking in the gaming sector is certainly heating up. Just a week prior to Microsoft’s announcement, US videogame holding company Take-Two interactive agreed to acquire mobile gaming specialist Zynga in a US$12.2 billion deal. The companies said the tie-up will help them better compete with traditional gaming firms such as Activision Blizzard and EA.
The largest media deal of the quarter demonstrates the disruptive effect of the pandemic. The US$15.3 billion proposed take-private of Nielsen by a group of private equity investors comes after a multiyear campaign by activist investor Elliott Management as the company faced pressures on its TV ratings business due to the growth of streaming. Elliot led the consortium to take the business private, along with its private equity arm Evergreen Coast and Canadian asset management firm Brookfield.
Nielsen has struggled to keep up with consumers’ switch to streaming for several years, but this has worsened during the pandemic, as streaming platforms grew at an even faster rate than before.
US banking sector attracts Canadian interest
With US$117 billion in deals announced, financial services was the second most active sector in terms of deal value. Consolidation within the North American banking industry was a major driver of this trend, as seen in Canada-based TD Bank’s purchase of US-based First Horizon, announced in February.
Large US banks currently need to comply with stringent regulation which inhibits further consolidation in the industry. This has opened the door for Canadian bidders north of the border to take advantage of the fragmented industry.
The US$13.4 billion deal will see the Canadian bank—which has been an active acquirer in the US banking market since 2004—become the sixth largest lender in the US. The purchase will increase its US assets to US$614 billion, with a network of 1,560 branches and a particularly strong presence in the south—including the large Texas market.
Real estate demand fueled by pandemic
Amid a somewhat quieter quarter compared to previous, real estate was the only top 5 sector to see an increase in deal value year-on-year. A total of 105 deals valued at US$81.1 billion were recorded in the sector in Q1—a 110% increase in value.
This jump was largely due to Blackstone Group’s US$23.8 billion recapitalization of its European logistics business, Mileway—the second largest transaction so far this year, across any sector. The move by the US PE giant signals a bet on increasing demand for warehouse space, with the recent ecommerce boom—fueled by the pandemic—resulting in sky-high demand. Widespread disruption of supply chains has also increased the need for warehouse space as companies look to keep stock in reserve.
Looking ahead to 2022, there are a few reasons for dealmakers to feel cautious. The Federal Reserve has recently hiked up its benchmark rate and has indicated that it plans to raise rates several more times this year in order to combat inflation.
Supply chain disruptions, a major cause of inflation, have been widespread during the pandemic, proving a continuing headache for businesses. Geopolitical uncertainty is exacerbating these issues, but even before the current conflict, economic growth was expected to slow down—the World Bank predicted in January that global GDP would grow at 4.9%, down from 5.5% it estimated for 2021.
Taking all these factors into account, it is perhaps easy to see why dealmakers might become more cautious over the coming months. Yet fundamental drivers of dealmaking remain, with recent developments demonstrating the importance of digitalization and the energy transition. Events of the last two years have also prompted a reforging of global supply chains, with more localized ecosystems becoming the new norm. Moreover, these headwinds are becoming to bring down valuation multiples, which have been rising consistently in recent years.
Although dealmaking will be tougher in 2022, dealmakers should seize the opportunity to find the best ways to use M&A to put themselves in a better position to undergo the ongoing systemic changes—in climate, technology and the global