Q3 2022 M&A Recap

M&A activity fell sharply last quarter, with global deal value down 50% from last year’s frenzied Q3. Roughly 5,100 deals totaled $730 billion in Q3 2022.

  •   The drop in activity is less dramatic than it seems, thanks to a record-breaking year last year. Total volume and value were almost equal to the third-quarter average for 2017-2019.
  •   Raw inputs, manufacturing, and energy were highlights for the year, driven by tightening supplies and sourcing risks.
  •   We expected a softer year ahead for M&A, and Q4 should see continued moderation.

Q3 is over, and the world is starting to really feel the pinch of rising interest rates and economic uncertainty. Equity investments are down across the board, and M&A activity is no exception. However, considering the headwinds it faced, Q3 looked a lot like the pre-pandemic normal.

Let’s break down the quarter’s activity, and go a little deeper than the dire headlines. 

Some of the quarter’s biggest deals include:

  •   Adobe’s $20 billion purchase of software company Figma, bolstering Adobe’s current collaborative design suite.  
  •   STORE Capital Corp, an American real estate investment trust (REIT), finalized a $14 billion plan to take the company private.
  •   Gas producer EQT moved to consolidate its market position with a $5.2 billion buyout of THQ Appalachia, a direct competitor.

There were few block-buster acquisitions during the quarter, with the average deal value dropping considerably. The market favored smaller acquisitions, and focused on strategic industries such as energy, logistics, and of course, tech.  

Top Performers

Energy, Raw Inputs

Some of the biggest M&A action this year has centered around energy and commodities. Given the supply and price volatility for these key inputs, this makes sense. Geopolitical tensions, the war in Ukraine, and changing economic relationships all create the need to reorganize to stay competitive.

Oil and gas have been attractive M&A targets this year. Industry players looking to consolidate, funds seeking to capitalize on higher prices, and other firms looking to shore up supply have all driven deal-making. Year-to-date, the industry has totaled nearly $150 billion in M&A value.

Mining, chemicals and minerals all have seen increased activity as well, particularly as a percentage of total M&A volumes. There is a growing awareness of commodity supply risk. This includes key inputs for high-tech products, as well as foods like wheat, of which Ukraine is a major producer.

Logistics, Manufacturing

Similarly, the global economic restructuring has companies seeking to secure their logistics and industrial solutions. Transportation has ranked among the largest sectors for deals this year, totaling $180 billion so far.

We expect manufacturing M&A to heat up in the years to come. This is because we expect supply chains to look markedly different in three years than they do today, particularly for key strategic industries like semiconductors, pharmaceuticals, and energy. A continued trend toward onshoring and “friend-shoring” will drive companies to consolidate, divest, and restructure as supply chains transform.

Tech: Still King of a (Smaller) Kingdom

Tech, especially computer software, saw the highest volume and value of all industries. The sector closed 1,200 deals, totaling roughly $180 billion. This is a major drop year-over-year, but demonstrates the continued dominance of the sector for defining tomorrow’s economy.

Big Dippers: Finance, Biotech

Life Sciences saw both total value and number of deals continue to fall from a peak in Q2 of 2021. As the pandemic was a major catalyst for activity, this decline is not surprising. While the total dollar value of deals fell by over two thirds from the peak, deal volume fell by just 35%, indicating lower valuations but more resilient activity.

Finance saw a similar drop. Total deal value fell 65% to $67 billion last quarter. Finance underwent major structural changes in 2021, gobbling up FinTech companies to compete in the post-pandemic world. Current activity looks similar to levels before the surge in activity from 2020 through 2021.

Big Comedown, Healthy Levels

The headline 50% drop in value is pretty jarring, and indeed, global risk appetite is much lower than it was a year ago. However, it is important to stress what a unique year 2021 was for M&A activity, and risk investments in general.

 It’s useful to look at activity before the pandemic, because that unique event spurred intense monetary and fiscal stimulus which drove greater investment.  It also fueled strategic acquisitions to tackle the economic disruptions, and resulting need to adapt, that the pandemic created.

Q3 2022 actually saw sixty more deals close than the average for 2017-2019. Though it also had a slightly higher total dollar value, when accounting for inflation it underperformed those years by a bit. The fact that performance was so similar to the 2017-2019 average indicates that this is likely a more “normal” investment level.

During the last recession, M&A value was cut nearly in half. Volume plummeted from over 16,000 deals in 2006 to less than 10,000 in 2009. In that light, the current fall in activity looks more like a return to trend than something more serious.

Activity Down Across the Globe, India Stands Out

Almost everywhere in the world has seen weaker M&A activity than last year. Geopolitical tensions, dropping risk tolerance, and rising costs of financing all contributed to the drop.

In this tougher environment, The United States proved the most resilient major market, comprising nearly 40% of total M&A value in Q3 2021, compared to just over 20% a year ago. Though valuations and sentiment are falling, the American economy has weathered the challenges of 2022 better than many countries.

India has been a standout market this year, with year-to-date activity actually up 56%. Financial services and technology, two areas that India seeks to lead in the developing world, were the country’s two biggest sectors for M&A.

India’s strength in a volatile market has fund managers taking notice. As Kaustubh Kulkarni, head of JP Morgan’s Southeast Asian investment banking wing, said recently,

“India is a super important market for sovereign funds, private equity and global pension funds, who are taking an increasingly important role in the number of M&A transactions that are currently happening,”

Q4: Expect the Expected

Sentiment is down, interest rates are up, and recession is looking more likely. There is little reason to expect a major bounce-back for deal-making in Q4. We expect a continued moderation in activity across the globe and across most sectors.

We expect continued outperformance from Energy, Industrials, Logistics and other sectors that benefit from reshuffling supply chains and rising energy costs. Technology, from software to semiconductors, should continue to comprise a major share of activity as well.

As we warned in our 2021 recap, interest rates and inflation are reliable predictors of M&A activity, as well as equities in general. If interest rates continue to rise, we expect activity to soften further. 

New call-to-action
Download the NDA Review Checklist.