In the first half of 2022, the mergers and acquisitions market is declining

Mergers and acquisitions activities have slowed compared to the record pace of 2021, with economic forces preventing transactions from being completed in the first half of 2022. However, according to PwC’s research Global M&A Industry Trends: 2022 Mid-Year Update, activity has only returned to levels seen in 2019, and it is expected that deal-making will play an important role in corporate growth strategies over the next six months, the statement said.

– Now is not the time for passive observation from the sidelines, but for re-evaluating or even resetting the mergers and acquisitions strategy. I undoubtedly expect to look back on 2022 as a pivotal moment where the successful deal-makers of tomorrow will be defined by those who boldly pursue their mergers and acquisitions goals today,” said Brian Levy, global leader of transaction services and partner at PwC US.  

Many of the factors that supported the record-high mergers and acquisitions market at the end of 2021 and in the first half of 2022, such as supply chain resilience, portfolio optimization, environmental, social, and governance (ESG) considerations, and above all, the need for technology to digitize business models, will continue to influence deal-making in the second half of 2022, but the approach to how these transactions are made will require a new focus in an uncertain economic environment.

With inflation reaching a 40-year high in many countries, deal-makers will need to approach due diligence from a different perspective – anticipating various inflation scenarios and considering implications for market share, price elasticity, customer and supplier relationships, as well as employee compensation and retention.

Workforce strategy will need to be a priority in every transaction as the highest wage inflation in decades, the trend of mass resignations (Great Resignation), skills shortages, and an increasing focus from stakeholders on diversity and inclusion will impact future business outcomes.

Lower valuations are expected to provide opportunities for corporate deal-makers and private equity firms to generate healthy returns in the currently volatile market. Evidence of lower valuations affecting mergers and acquisitions activities is already visible, as investment transactions from limited liability companies to public companies have increased by more than 50 percent in 2022 compared to the same period last year.

Mergers and Acquisitions Trends in the First Half of 2022

Although mergers and acquisitions activities slowed in the first half of 2022, they actually returned to pre-pandemic levels, averaging around 25,000 transactions per half of the calendar year.

The reset of mergers and acquisitions is occurring across all major regions. The Asia-Pacific region experienced the largest decline, with the volume and value of transactions more than 30 percent below the peak in 2021, primarily due to macroeconomic barriers and recent pandemic-related restrictions imposed in several major cities in China.

The values of mergers and acquisitions have also fallen to similar levels as before the pandemic, with transaction values in the first half of 2022 of approximately $2 trillion nearly double those recorded in the first half of 2020, a period that also experienced high levels of uncertainty regarding economic conditions. The total number of megadeals globally (transactions valued at over $5 billion) decreased by a third. However, the first half of 2022 was not entirely devoid of large transactions; in fact, four transactions valued at over $50 billion were completed, compared to just one transaction throughout 2021.

Private Equity Expands Its Share in Transaction Volumes and Values

The evolution of the private equity model has made it a driver of mergers and acquisitions, providing a plentiful source of capital for executing transactions. Global private equity capital earmarked for investments but not yet directed towards specific investments (‘dry powder capital’) reached a record $2.3 trillion in June 2022, three times the amount that existed at the start of the global financial crisis. This capital growth explains why the share of private equity in M&A has increased from about one-third of total transaction value five years ago to nearly half of total transaction value today.

However, private equity is not immune to market volatility and rising uncertainty.

– Private equity firms are facing challenges due to rising costs and interest rates, contractual multiples in public markets, and declining consumer confidence. Private equity firms will need to focus on increasingly sophisticated value creation strategies such as digital transformation and cloud replatforming, along with a sharp focus on addressing inflationary cost increases to achieve returns,” said Will Jackson-Moore, global leader of private equity, long-term assets, and sovereign funds services and partner at PwC UK.

Mergers and Acquisitions Trends by Sector

Current macroeconomic factors and trends are affecting transactions in different sectors in various ways:

• Technology, Media, and Telecommunications (TMT): Digital adoption of new technologies remains a priority, keeping TMT at the top in terms of mergers and acquisitions investment, accounting for more than a quarter of transaction volume and one-third of transaction value in the first half of 2022. We expect that in the second half of 2022, technology demand will create opportunities for mergers and acquisitions in software and in technologies supporting infrastructure (such as 5G, data centers, and the metaverse and related technologies).

• Financial Services (FS): The need for digital capabilities in the financial services sector, combined with ongoing regulatory pressure and disruptions from platforms and fintechs, means that mergers and acquisitions will continue to be drivers of transformation. This also explains why the financial services sector, immediately behind TMT, ranks high in terms of mergers and acquisitions investment, accounting for nearly a quarter of transaction value in the first half of 2022. A continued focus on technology, increasing demand for sustainable investment options, and lower valuations will maintain a high intensity of mergers and acquisitions activity throughout the second half of the year.

• Consumer Markets: Mergers and acquisitions activity in the consumer markets sector over the next six months will be closely linked to how uncertain economic outlooks will affect consumer confidence and spending. Companies are seeking to transform business models and reposition themselves for future growth, and changing consumer preferences will continue to create opportunities for mergers and acquisitions.

• Industrial Manufacturing and Automotive (IM&A): A continued focus on technology and digitalization of business models, investment in supply chains, and workforce will create opportunities for mergers and acquisitions in IM&A.

• Energy, Utilities, and Resources (EU&R): The ongoing acceleration of the energy transition and an increasing focus on supply chain security will drive mergers and acquisitions in critical minerals and national energy supply areas in the second half of 2022.

• Healthcare Sector: High demand for biotechnology and innovative new technologies, such as mRNA, gene therapy, and remote healthcare capabilities, is attracting investor interest. To achieve inorganic growth objectives, large pharmaceutical companies are likely to undertake a greater number of smaller transactions to avoid regulatory scrutiny and the complexity that larger transactions can bring.

– We are witnessing an acceleration of strategic decisions to improve portfolio optimization, as deal-makers sell off parts of their businesses to free up capital and focus on acquiring capabilities and transforming core business areas through M&A,” highlighted Malcolm Lloyd, global leader of transaction services and partner at PwC Spain.

– There is no doubt that the bar for success has been raised for deal-makers. However, we remain optimistic that the need for quick and agile maneuvering in current challenges will ensure that mergers and acquisitions remain a strategic priority, helping companies transform, grow, and build new foundations for their future success,” added Brian Levy.