- Across the board, 2022 was a weaker year for M&A than 2021. Deal volume fell slightly, thanks to a strong first half, while total deal value fell by about a third from 2021’s unprecedented levels.
- The softened activity is due to weaker economic optimism, rising interest rates, and the fact that 2021 enjoyed a lot of deferred demand from 2020.
- Some of the biggest deals of the year, both completed and scrapped, met heavy regulatory scrutiny and immediate devaluations after acquisition.
- 2023 is proving a very difficult year to predict, but few analysts expect it to break records.
2022 Ends with a Whimper
For the first time since 2018, M&A activity failed to pop up in Q4. Both Q3 and Q4 saw activity slump dramatically from the first half of the year.
As we predicted at the beginning of the year, M&A activity suffered through the quarter. The momentum from a record 2021 carried through part of the year, with Q1 setting a record with nearly 8,500 transactions. However, Q3 and Q4 saw activity drop dramatically, snapping the eight-quarter streak of $1 trillion-plus in deal value.
The smoking gun is interest rates. To tame rising inflation, central banks around the world are tightening their monetary policy. For the first time since 2007, the Federal Reserve’s interest rate is above 4%. That means both consumption and investment are more expensive, making companies think twice about the eye-popping valuations that they accepted in 2021.
Some of the year’s biggest deals of the year include:
- Elon Musk’s highly publicized acquisition of Twitter for $44 billion. The deal adds another leading tech company to the PayPal founder’s impressive portfolio, which includes Tesla and SpaceEx.
- Semiconductor manufacturer Broadcom’s $61 billion acquisition of VMware, marking an aggressive entry into cloud computing.
- Kroger’s announced acquisition of fellow grocer Albertson’s for just under $25 billion, which would make it the second largest grocer to Walmart.
- Biopharma giant Amgen’s $28 billion purchase of Horizon Therapeutics, strengthening the company’s presence in the treatment of autoimmune, inflammatory and rare diseases.
New Places, Same Struggles
From kinked supply chains to central bank tightening, few countries were spared a tougher economic climate in 2022. The most persistent trend across the world were the rising price of goods and falling price of assets, including targets for acquisition. This is evident in the fact that virtually every region saw total deal value fall by between a quarter and a third, while the number of deals fell only slightly.
(Bio)Tech, Supply Chains and Gaming
At the start of the year, we predicted that cost reduction and market share expansion would be major trends in 2022. That seems to have played out, though the financing environment has slowed down M&A across the board from the breakneck pace of 2021.
While Logistics, transportation, and other supply chain sectors joined the broader market in slowing down last year, analysts expect the sector to broadly outperform in 2023.
As a recent PWC report noted, “Global players whose results were boosted during the pandemic are using this time as an opportunity to vertically integrate and expand onshore capabilities in foreign locations.”
Gaming is becoming a hotter battleground industry for tech giants to contend over. There were a number of transactions, some of them controversial, in the gaming space this year.
Microsoft is pursuing an acquisition of Activision this year, which tops the list as the largest and most heavily scrutinized deal in gaming. However, both Sony and Netflix have aggressively acquired companies in the space, signaling a race to consolidate the market, as well as a recognition of the major status that the industry has attained.
Biotech, and technology in general, continue to lead in value and volume, particularly when it comes to the biggest deals. Amgen’s $28 billion is one of the year’s biggest. Biotech companies are still sitting on hundreds of billions in dry powder, so we expect activity to continue to outperform in 2023.
Lower Valuations, Resilient Volume
While deal value fell substantially, volume held its own compared to 2021. This shows that there is still a healthy appetite for combinations, but not at 2021’s price points. Companies likely pursuing and accepting smaller acquisitions for two reasons: regulation and rates.
A dollar is more expensive than it was a year ago, both in terms of the cost to borrow and the opportunity cost of something safer, like a high-quality corporate bond that pays 8%. In a tighter environment, target firms have to accept a soberer valuation, and acquirers have to more heavily discount future performance against the cost of financing.
On the other hand, high-profile acquisitions are attracting the wrong type of attention from regulators.
Regulatory Risks Mean Smaller Deals Ahead
Regulatory risk is one challenge that will likely persist in both the world’s biggest economies, the United States and China. Both the administrations of President Biden and President Xi Jinping have taken a more skeptical stance on tech giants in their countries, which wield growing power in public life and the economy.
President Biden has publicly scrutinized the market power of major corporations in the United States, and his administration has made antitrust enforcement a greater priority. Xi Jinping has sought to rein in the massive tech companies of China, such as Alibaba.
In a recession, both leaders may adopt a more hands-off approach to capital markets, in the interest of reducing inefficiency and spurring growth. However, market-consolidating deals, particularly between large companies, will likely receive greater scrutiny in 2023 as well.
Many of the year’s biggest deals, including Broadcom, Kroger, and Microsoft’s acquisitions, have been flagged by antitrust regulators and unions as dangerous to their markets. One or more of these acquisitions may ultimately be blocked. Mega-mergers face an uphill battle in the world’s biggest markets, including the EU, which will likely lead to less ambitious transactions in 2023.
2023: Verticals and Market Share, Fewer Mega Deals
2022 was a sobering year for the global economy. It marked a long-awaited comedown from the sustained bull market of the 2010’s, boosted near the end by unprecedented stimulus from central banks in response to the pandemic.
In a tighter interest rate and regulatory environment, don’t expect 2021 redux this year. While activity is likely to resemble 2022, or even soften further, the largest companies still have huge amounts of cash to spend on acquisitions.
We expect vertical integration and market expansion to define the year, rather than strategic entries into unfamiliar markets, like we saw in 2021. Deals will likely trend smaller, since the biggest M&A markets face a tougher regulatory environment than in previous years.