Besides the stock market, mergers and acquisitions are probably the first victims of any crisis, especially when that crisis involves inflation and interest rate hikes. In this brief analysis, we’ll look at how the global M&A market performed thus far in 2022.
The mergers and acquisitions market has had its all-time high in 2021. After the pandemic ridden 2020, during which the global M&A amounted to USD 3.6tn (a decrease of 10% compared to 2019), 2021 marked such a high point that it surpassed all previous years, and by a strong margin. In total, USD 6.1tn went into M&A in 2021, which if we were to put things into perspective, would mean that you could buy approximately 90 Croatian 2021 GDPs at that time. Simply massive amounts.
Even though in 2022, there were also staggeringly large transactions already announced, such as Broadcom’s acquisition of VMware (priced at USD 70.4bn), Microsoft’s acquisition of Activision Blizzard (USD 67.9bn), and the largest acquisition in Europe in 2022, of Atlantia SpA for EUR 41.6bn, by a consortium led by Edizione SpA, these transactions, as with many others, were announced back in the first half of the year. Even the now infamous Twitter deal by Elon Musk, currently valued at USD 36.7bn, was announced back in April 2022. The trend, however, has not been positive for the remainder of the year, and as we can see in the graph below, the deal amount slowed down significantly.
Global M&A deal value (Q1 2015 – Q3 2022, USDbn)
As we can see in the graph, the total value of M&A during the 9M 2022 amounted to USD 3.02tn. This is a decline of 34% compared to the same period in 2021. Looking at the quarterly changes, the trend is even more evident. In Q3 2022, the global M&A deal value amounted to USD 722bn, which represents a decrease of 55% YoY.
So having all of this in mind, what is going on here? To answer this question, we should also take a look at the geographic and industry distribution of these deals, as only then can the whole story be taken in context. This is because for North America (of which the US makes up the vast majority) and Europe, the causes are similar but there are some differences.
According to Mergemarket, the distribution by region is the following: 38% of all deals were done in the North American region, 29% in the European region, and 13% in the North Asian region, making up 80% of the market. 5% goes to India, 4% to Australasia, and 4% to Latin America, meaning that 93% of the global M&A is concentrated in those regions. All of this data is available in the pie chart below:
Global M&A value by region in Q3 2022, %
Furthermore, taking a look at the distribution of M&A deal value by sector, we get the following:
Global M&A value by sector in Q3 2022, %
As expected, the largest M&A is in the technology sector at 20%, 11% is in utilities and energy, 9% is in healthcare, 8% is in the telecom industry, and 6% is in oil & gas, consumer products, and real estate/property, respectively.
Having this in mind, we can explain the factors leading to the decline. Firstly, let’s start with the largest region, North America. In 9M 2022, North America’s M&A amounted to USD 1.3tn, which is 43% down in value compared to the same period in 2021. In Q3 2022, deals amounted to USD 273bn only, which is a decrease of 63% compared to the same quarter last year. In fact, in September alone, only 488 deals were signed, worth USD 107bn. The largest of these include Adobe’s USD 20bn acquisition of Figma and the USD 13.8bn acquisition of STORE Capital by GIC and Oak Street Real Estate Capital. The main reason for this decline is of course the high inflation rates in the US, which amounted to 8.2% in September 2022. It isn’t only the inflation that is the problem however, it is stubborn and persistent inflation that continues month over month. Even if it’s slightly decreasing or growing, it’s still way above the Fed’s target of 2%. This brings us to the 2nd reason, and that is the interest rates in the US. Currently, Fed funds target rate stands between 3 – 3.25% and is expected to increase to over 4% in 2023. Higher interest means two things: Debt is more expensive, and exports are more expensive. Combined with the negative sentiment on the market, the companies are focused more on maintaining their current margins and reducing costs.
Despite this, however, according to Mergemarket, bankers they’ve interviewed say that firms are still willing to transact despite the inflation, higher interest rates, and the increased likelihood of a downturn. The only issue for them is settling on the price. In terms of the value by sector, technology contributed to 40% of overall M&A in North America in 9M 2022, but this was skewed by Microsoft’s Activision Blizzard deal, and VMware’s sale to Broadcom, as well as Elon Musk’s Twitter buyout. Healthcare was the 2nd most active sector with 228 deals worth USD 39.4bn, led by Pfizer’s USD 5.3bn acquisition of Global Blood Therapeutics, ChemoCentry’s USD 4.5bn acquisition of Amgen, and Amazon’s USD 3.7bn purchase of 1Life Healthcare. So despite the slowdown in M&A, the current environment also presents an opportunity for further consolidation.
Taking a quick glance at the EMEA (Europe Middle East Africa) region, the M&A activity amounted to USD 227.4bn in Q3 2022, its lowest quarterly value since Q3 2020, when economies were only just starting to recover from the pandemic. In fact, this represents a decline of 35.6% compared to Q2 2022. In total, EMEA had 10,029 deals this year worth a combined USD 861.7bn, which is a 21% decrease in value against the same period last year. The M&A market is facing a lot of macroeconomic issues in this region. First of all, the primary debt market is almost at a standstill, with the M&A increasingly dependent on direct lending. The difficulties with financing, combined with the challenges surrounding inflation and valuation expectations have created a perfect storm leading to an inevitable collapse in M&As. Because of this, deal makers are likely to focus on continued corporate divestments and private equity in order to sustain faltering M&A activity, while currency fluctuations could also trigger a rush in foreign interest. Given that the macroeconomic situation is not likely to improve anytime soon in Europe, the prospects for the M&A market are also not so bright, and as such, 2022 could end up being at or below 2020’s level overall.
