Natalia Chi
M&A got off to a flying start in 2022 with robust deal activity and megadeals dominating the landscape, largely the result of unprecedented fallout from 2021.
On the surface and relative to historical performance, it was another solid year. According to Mergermarket, a total of 8,468 M&A deals were announced in the United States in 2022, valued at a combined $1.6 trillion. While that was a year-over-year decline, in volume and value terms, of 10% and 38%, respectively, it was still exceptionally strong. Looking ahead, the deal count is higher than in any year except 2021.
Megadeals worth over $5 billion have also been a major feature, thanks to some monumental tech transactions. Data from the Mergermarket shows that large-cap deals accounted for more than 40% of the total value of deals, corresponding to 2021. Based on these statistics alone, 2022 looked like a good year for M&A.
Looks can be deceiving, however, and 2022 has been a year of two halves. Several large technology deals increased deal value during the first half of the year. Microsoft’s $75.1B Merger Offer for Game Developer Activision Blizzard, Broadcom’s $71.6B Merger Offer for VMWare, and Elon Musk’s $44B Twitter Acquisition , the top three major deals of the year, were all announced between January and May. This helped ensure that technology remained the dominant sector by value, with deals worth a combined US$612.6 billion, and maintained the top spot measured by volume with 2,589 deals.
The value of US M&A deals in 2022: a 38% decrease from 2021
The decline in the value of US M&A deals in the second half of 2022 compared to the first half of 2022
Slowdown in the second half
A very different picture emerged in the second half of the year once the spillover from 2021 receded and momentum was lost. Deal announcements were fewer and farther apart as the reality of rising inflation and the Fed’s tightening path came into sharp relief and the S&P 500 entered bear market territory. Fears of a future recession have begun to enter the conversation.
There were 3,659 deals in the second half of this year, worth $636 billion. That compares with first-half totals of 4,809 transactions valued at $981.6 billion (representing a 24% and 35% decline, respectively). Analyzing further, levels of mergers and acquisitions continued to decline throughout the year, each quarter showing a successive decline in deal volume and value.
SPAC’s business has followed a similar path, with 16 listings on US stock exchanges in the second half of 2022 worth $1.3 billion, up from 70 listings worth $12.1 billion in the first half of the year .
Market fixes
It may take some time for private market valuations to catch up with the decline in public market equity valuations. The resulting discrepancy in value perspectives between buyers and sellers negatively impacts trading activity.
This year’s Fed policy change has had two main impacts on capital markets which are clearly dragging down sentiment and trading activity. The large decline in stock prices, and therefore in corporate valuations, has made issuing equity to finance operations much less attractive to targets and dilutive to shareholders. This is especially true in the technology sector. As of mid-December 2022, the tech-heavy Nasdaq 100 was down 32% year-to-date (compared to a less than 20% decline in the S&P 500).
It may take some time for private market valuations to catch up with the decline in public market equity valuations. The resulting discrepancy in value perspectives between buyers and sellers negatively impacts trading activity. Some prospective sellers may feel compelled to wait for more positive macro news, and instead are focusing their attention on operational support and value protection until the dust settles.
In principle, this could be a can’t-miss buying opportunity for PE. Middle-market players have found themselves in a clear advantage, supported by a favorable private credit ecosystem. This lifeline is not available for larger PE deals and the substantial weakening of government debt markets in the second half of the year is hampering the top end of the PE acquisitions market in particular. Rising interest rates have also made loans prohibitively expensive, where they are even available. According to Debtwire Par, primary issuance on the institutional loan and high-yield bond markets in the United States decreased by 68 and 78%, respectively, on an annual basis.
Mixed signals
Outside of the fundamental market forces, there are policy and enforcement developments that are proving to be both carrots and sticks. The recently passed Inflation Reduction Act has created attractive tax incentives for investment in the renewable energy sector, unlocking approximately $400 billion in federal funding. Investors are actively strategizing to capitalize on this opportunity, and this will play out for years to come.
At the same time, antitrust actions are being implemented with a fervor and level of coordination never seen before. In December 2022, the Department of Justice and the Department of Health and Human Services’ Office of the Inspector General announced a new partnership to protect healthcare markets, while the Federal Trade Commission questioned some of the earlier deal announcements. important last year.
These mixed signals are complicated by the uncertainty of the macroeconomic outlook. Inflation is showing signs of improvement, but remains well above the Fed’s 2% target. Jobs reports also continue to beat expectations. As of today, however, the Fed is still not deviating from its plan to slow the job market and tackle inflation.
As we look into the new year, there are two camps. Some expect further hardship ahead – admittedly, debt financing will remain expensive until further notice – but a full-blown recession looks increasingly unlikely. Optimists, meanwhile, don’t rule out the Fed reaching its legendary soft landing. One thing is clear, the first half of 2023 will look more like the second half of 2022 than last year’s upbeat opening half.
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