Q2 M&A: Slowing But Still Strong

Q2 M&A: Slowing But Still Strong 

• Global deal-making topped $1.2 trillion in Q2 and nearly 6,000 transactions, marking a continued slowdown from 2021 but well above the pre-pandemic average.
• The prevailing trend for the year is a moderation from the record-breaking highs of 2021, along with continued momentum that made 2022 one of the biggest first halves of any prior year.   
• While M&A remained strong, IPOs are way down across the board, part of a rocky year for equities.  
• Companies continue to invest in tech. They’re also seeking greater security in a world that looks more tumultuous and unpredictable than it did five years ago.

It’s been a volatile quarter for virtually every economic metric, from commodity prices to stocks, and general inflation. For the most part, the quarter has soured investor sentiment. As inflation rages on and central banks tighten their belts, one would expect much more of a reaction from the M&A market than we saw in Q2. 

Deal value was down 25% year-over-year, yet still about 30% above the 2015-2019 average. While marking a slowdown from 2021, it was still the second-biggest Q2 in fifteen years, ending a remarkable first half of the year. 

Major deals this quarter include: 

• May’s $27 billion megamerger between Advocate Aurora Health and Atrium Health. 
• Pfizer’s move into migraine treatment with $11.6 billion acquisition of Biohaven Pharmaceutical Co. 
• Broadcom’s announced acquisition of VMWare, valued at over $60 billion. 
• Thermo Fisher’s $21 billion acquisition of contract research firm PPD inc. 

Dealmaking Strong, but IPOs Take a Hit  

IPOs were softer across the board in Q2, with the Americas seeing the most dramatic drop.M&A activity across regions was lower than 2021 but still stronger than previous years. However, the IPO market looks decidedly dull compared to the past five years. This is likely due to a bearish feeling in equity markets, as well as the sense that earnings multiples will probably continue to fall throughout the year, making it a poor time for an IPO. 

The Americas, dominated by the US market, saw IPO proceeds fall over 90% year-over-year, an even more dramatic drop than we saw in the pandemic-stricken 2020 market. The Middle East, buoyed by surging oil prices and a concerted regional effort to diversify and modernize, stood out with robust IPO activity.  

Interestingly, China saw significant IPO proceeds this year, despite lagging M&A activity. Companies may perceive China’s regulatory environment as more amenable to an IPO than an acquisition, as mega-firms like AliBaba face greater scrutiny. 

New M&A Trend: “Friend-Shoring”

A more uncertain geopolitical environment has raised the proportion of domestic deals, but has also led to greater activity between friendlier states. Such examples would include deals within Europe, or between the United States and allied nations like Japan, the UK, and Australia. 

As Ernst and Young described in a recent report, “CEOs are more selective in who they do deals with, preferring to ‘friend-shore’ their operations and pursue transactions within friendly pockets rather than applying a truly global approach.”

Chinese M&A Investment in Foreign Companies

China shows the powerful impact of capital’s flight onshore. In 2016, 62% of China’s acquisition value was for Chinese target firms, with the other roughly 40% going to acquisitions abroad. Year-to-date, that figure has plummeted to just 6% of M&A capital targeting foreign firms. In the United States, Chinese M&A funds have dropped from nearly $60 billion in 2016 to just over $1 billion in the first half of this year, on track to be the smallest figure since 2008.  

As the world realigns its economy for a new international order, expect M&A activity to stay domestic among close countries, both in terms of geography and relationships. Potential winners include high-growth countries with friendly relations with the West, such as India. India was a standout in Q2 with record-breaking M&A value. 

Other Trends 

As the post-pandemic economy continues to take shape, companies are prioritizing supply chain and energy security, as well as an edge in tech, above most other considerations. 

Technology, particularly software solutions, continues to dominate the M&A space. Computer software deals alone totaled $275 billion, more than 20% of all M&A value. Companies are doubling down on the bet that software solutions will drive tomorrow’s economy, and are making both strategic acquisitions to buttress their business models, as well as pure growth plays in the space.

Supply chains continue to vex boardrooms, and much of the quarter’s M&A deals are related in some way to productive and logistical security. While technology continued to lead, the Industrials & Chemicals, Transportation, and Energy sectors combined for nearly 30% of M&A funds. The smaller, more strategic deals in this space suggest strategic acquisitions to better secure company supply chains. 

The Financial sector continues to see robust M&A activity, with roughly seventy deals each in Fund Management, Insurance, and Retail Banking. If the last recession is any indication, this sector could heat up even more if economic conditions worsen. 

The Healthcare sector also continues to outperform. Two of the quarter’s biggest deals were in the healthcare sector, and fundamental tailwinds will continue to propel the healthcare space in the years to come, both as the global population ages and as new technologies revolutionize medicine. 

All Eyes on Q3 

Q2’s M&A activity largely disproved the broader market pessimism that we saw during the quarter. Activity in core sectors like Technology, Healthcare, and supply chain drivers remained strong, though activity was broadly weaker than the record-breaking year of 2021. We expected this, since 2021 included a rebound in sentiment after the pandemic as well as deferred demand from 2020.  

Much like Q2, the third quarter and the rest of 2022 will be a bellwether for how the M&A market (and the broader economy) will look in the next few years. Things to watch include inflation and interest rates, a recession in the US and other major economies, and geopolitical tensions spilling into capital and commodity markets. 

We were optimistic about 2021’s momentum carrying into 2022, and the first half of the year confirmed that. We expect activity to continue to soften through the year, driven by powerful, enduring trends such as higher interest rates, tighter supply chains, and more friction in our globalized economy. That said, 2022 should still be a standout year for M&A, beating out most of the previous ten years.