After reaching unprecedented highs in 2021, global M&A markets had a bumpy ride in 2022 as dealmakers grappled with inflation, rising interest rates and fallout from the conflict in Ukraine.
Despite these declines, deal value and volume did beat 2020 benchmarks, driven by a cluster of megadeals that landed in the first six months of 2022—seven of the 10 largest deals for the year were announced before the end of June. Deal activity through the second half of the year, however, started to decline.
Dealmakers sit tight
Deal activity ebbed as inflation remained stubbornly high and central banks responded by raising interest rates. In the UK and Europe, where inflation hit the highest levels seen in decades, the Bank of England and European Central Bank upped interest rates to levels not seen since the 2008 credit crunch. In the US, the Federal Reserve upped its benchmark rate to a 15-year high, in an effort to dampen inflationary pressures.
Rising rates increased financing costs and made it more difficult to secure funding for transactions and meet vendor pricing expectations, putting some deals in limbo. In addition, volatile stock markets—the MSCI World Index shed 17.73% of its value in 2022—COVID-19 lockdowns in China, climbing energy prices and events in Ukraine have all taken a toll on dealmaker confidence.
A steady decline in special purpose acquisition company (SPAC) dealflow, a major spur of M&A activity in the US in 2021, has also knocked year-on-year comparisons. De-SPAC M&A value in the US—the dominant global SPAC market—came to US$167.5 billion according to Dealogic, a significant drop from the US$502.8 billion witnessed in 2021. SPAC vehicles struggled to land deals and risk averse investors chose to redeem their shares rather than take equity in de-SPAC deal targets.
Faced with these uncertainties and with key pools of M&A capital drying up, dealmakers have become more risk averse and opted to take a breath, waiting for markets to settle before pushing ahead with new deal opportunities.
Tech wobbles, but continues to lead the way
Despite deteriorating conditions for deals, however, large transactions have progressed, with investors shifting focus from expansionary, growth-driven activity into sectors seen as more resilient and offering protection against downside.
Despite a 43% fall in year-on-year deal value to US$1 trillion, the global technology, media, and telecom (TMT) sector remained the largest by deal value by some margin. Total transaction value for the sector was almost double the US$515.8 billion secured in the second-ranked energy, mining and utilities space, which only saw a 22% drop in year-on-year deal value, supported by higher energy prices.
The industrials and chemicals (I&C) sector generated the third-highest deal value for 2022, with transactions worth US$489.9 billion (down 30% year-on-year), followed by financial services at US$358 billion (down 37% year-on-year).
TMT deal value was skewed in the first half of the year with the announcement of Microsoft’s US$68.7 billion takeover of gaming and content group Activision Blizzard, Broadcom’s US$71.6 billion purchase of enterprise software developer VMware and Elon Musk’s US$44 billion take private of social media platform Twitter, all announced before the end of June.
Big-ticket TMT dealmaking cooled through the second half of the year and the punchy valuations that characterized technology M&A and funding rounds have corrected in line with public technology stocks (the Dow Jones US Technology Index has lost a third of its value in the past year).
Nevertheless, in a choppy market, dealmakers continued to cluster around business-critical technology and software providers with sticky customer bases and high quality, subscription-based recurring revenue streams.
Assets in other sectors with similar characteristics also maintained traction with dealmakers through the macroeconomic dislocation of 2022. The transport sector, for example, only suffered an 11% year-on-year dip in deal value, with investors attracted to business like Atlantia, the Italian toll road and airport group that attracted a bid in excess of €54 billion from the Benetton family and US private markets manager Blackstone.
The adjacent warehouse and logistics sub-sector also chugged along, with warehouse operator Prologis moving for counterpart Duke Realty in a US$26 billion all-stock deal and Blackstone landing a US$23.8 billion recapitalization for pan-European last mile logistics portfolio company Mileway.
Moving into 2023, M&A markets are expected to remain challenging. Central banks on both sides of the Atlantic have signaled that more interest rate hikes are on the horizon, energy prices remain elevated, the conflict in Europe drags on and debt markets remain tight.
There are some signs, however, of green shoots emerging. Although more interest rate hikes are anticipated, there are signs of inflation peaking, which will ease the pressure on central banks to keep upping rates. A more stable backdrop for interest rates will make it easier for dealmakers to establish valuations and model financial structures, helping unlock more transaction flow. Easing COVID-19 restrictions in China, meanwhile, could also help to boost sentiment, although the risk of a new wave of infection as the country reopens fully remains a concern.
The downward pressure on valuations observed through 2022 could help to reignite deal activity, with cash-rich buyers well-positioned to acquire high quality assets at attractive entry multiples. Cross-border M&A—particularly from the US into the UK, where weaker sterling has benefitted investors deploying dollars—will also prove attractive for dealmakers.
Deal markets are expected to benefit from the huge amount of investment that will be required to transition the world’s energy system from hydrocarbons to renewables. McKinsey estimates that US$275 trillion of investment will be required to achieve net zero carbon emissions by 2050. M&A capital will be a crucial lever for delivering these objectives.
After a challenging year, dealmakers still have a winding path to negotiate in 2023, but compelling deal opportunities will continue to present themselves.