Dealmaking Declines by Over 30% in a Volatile, Inflationary 2022

In 2022, the global mergers and acquisitions activity saw a sharp decline of almost a third compared to the previous year due to the persistent high inflation, increasing borrowing costs, and the geopolitical instability.

Data compiled by Bloomberg revealed that companies announced $3.5 trillion in deals in 2022. These transactions were made to expand existing businesses, enter new industries, or restructure operations in the midst of a tumultuous market with falling stock prices and strong antitrust regulations. Initially, there were many megadeals announced at the start of the year, but the number of deals decreased significantly from May to June. The volumes have not yet returned to their original levels.

Melissa Sawyer, the global head of Sullivan & Cromwell's M&A group, noted that the year 2022 has been a tale of two halves. She commented that at the start of the year, deals were being made rapidly and SPACs were still popular. However, the M&A landscape has since shifted drastically.

At the beginning of 2021, Microsoft Corp. made a major move by agreeing to purchase Activision Blizzard Inc. for a whopping $69 billion, the largest deal since 2019. This set the tone for the year, which saw a record-breaking $5 trillion in deals announced. It seemed like 2021 was off to a great start.

The atmosphere changed drastically in February when Russia invaded Ukraine, and the following month the US Federal Reserve began its most intense interest rate hike in years, raising the overnight rate to the highest it had been since 2007.

Damien Zoubek, co-head of US M&A at Freshfields Bruckhaus Deringer, commented on the current state of the market, noting that there are a number of factors at play, such as inflation, the central bank's response to it with higher interest rates, geopolitical issues, supply chain problems, and extreme stock market volatility. He likened the situation to a Cuisinart, saying that all of these elements combined have created a choppy M&A market.

The pursuit of Twitter Inc. by Elon Musk caused a stir in the dealmaking world, as the billionaire changed his plans to take the social media network private multiple times over the course of several months. When the $44 billion buyout was eventually completed in October, a Morgan Stanley-led group was left with a hefty $13 billion debt financing.

Volatility has been a major obstacle to dealmaking and the market for initial public offerings this year. The Cboe Volatility Index, or VIX, has been higher than its usual average, reaching a peak of 36.45 in March.

Data up to December 15th, 2022 is available.

The closure of the IPO window has taken away an exit option for investors and a source of funding for companies that were thriving just a year ago. Bloomberg's data shows that only $24 billion has been raised in US IPOs this year, the lowest since 2009. This backlog could result in more acquisitions of startups in 2023.

Edward Lee, a partner at Kirkland & Ellis, noted that many management teams and boards are now aware that the multiple reset is not a short-term situation. He went on to say that when a buyer offers a substantial premium, it is difficult to ignore. Consequently, targets are increasingly likely to take such offers seriously.

Private equity firms experienced a similar trend to public company M&A in terms of dealmaking. The year began with a large transaction: the $16.5 billion acquisition of Citrix Systems Inc. by Vista Equity Partners and Elliott Investment Management. However, the situation changed as inflation began to affect firms' operating costs and margins, monetary tightening around the world made buyouts more costly, and banks were left with unsold debt. According to data provider Preqin, buyout volumes decreased in every quarter of the year.

Kristoffer Melinder, managing partner at Nordic Capital, expressed his surprise at the difficulty of the situation. "I expected it to be difficult, but not this hard," he said. "The issue is the cost, and to resolve it, we need to lower the rates - let's be honest about it."

Data from the year 2022 is available up to December 15th.The difficult financing climate has caused some private equity transactions to be cancelled or delayed. To make up for this, sponsors have had to become more inventive. Some have chosen to use more equity to finance deals, while others have done away with debt altogether. Despite the lack of easy financing, buyout firms still have a large amount of capital available. As public markets decline, boards may become more comfortable with the new valuations, thus creating opportunities. In the interim, companies are selling off assets.

Marco De Benedetti, co-head of Europe private equity for Carlyle Group Inc., noted that carveouts occur when large companies re-evaluate what is not essential. He added that this is especially common during periods of instability, which is the case at present.

Jim Langston, co-leader of US M&A at Cleary Gottlieb Steen & Hamilton, suggested that there could be more consolidation in the consumer products industry.

According to Langston, there are many chances to use spinoffs to differentiate high-growth from low-growth assets and gain multiple re-ratings. This is especially true in the current climate, which is more difficult than usual to do divestitures due to regulatory pressures, equity market volatility, and financing disruption.

As the year came to a close, financial services dealmakers experienced some positive developments. Insurer Aegon NV and ASR Nederland NV joined forces in a multibillion-dollar transaction, while HSBC Holdings Plc agreed to sell its Canadian operations to Royal Bank of Canada for approximately $10 billion. This move follows a pattern of European banks leaving the North American market.

Andreas Lindh, co-head of JPMorgan Chase & Co.’s financial institutions group in Europe, the Middle East and Africa, noted that the most prominent trend in mergers and acquisitions in banking has been the ongoing consolidation of global banking groups.

The success of 2023 will depend on when markets become more secure and postponed projects can resume. Additionally, the outcome of the US Federal Trade Commission's trial against Microsoft's acquisition of Activision Blizzard, which is set to begin in August, will be a major factor.

Advisers are hoping that activity will increase in 2023, particularly in the first half of the year. Last week, Amgen Inc. announced a $27.8 billion deal to purchase Horizon Therapeutics Plc, which could be a sign of more large deals to come.

Brian Haufrect, co-head of Americas M&A at Goldman Sachs Group Inc., noted that after a few quarters of processing the events, it appears that the situation is becoming more stable. He added that the financing markets have been operating more efficiently and that all the necessary components for M&A are still present.