M&A deal volume fell 14% in the first half of the year compared to 2022: What happened?

As the global economy traverse uncertainty, macroeconomic pressures, and a wave of bank failures that cast major doubt on the trustworthiness of the global banking system, M&A activity plunged for the first half of the year.

Reuters reported that in Q1 of 2023, the global M&A market announced deals valuing a total of $601 billion. In Q2, the global M&A deal value totaled $733 billion, which represents a 36% drop from the $1.14 trillion the markets witnessed in Q2 of last year. Both Q1 and Q2 of this year accounted for a total of $1.35 trillion in M&A deal value thus far, which is 38% lower than the total M&A deal value of the first half of 2022. Additionally, there was a 14% decline in the number of M&A deals for the first half of the year, with a total deal volume of approximately 25,630.

While this did not come as a total surprise, there are several variables that affected market outcomes and deal activity. Back in January, we published two articles about three M&A deal trends to not be surprised about and what to expect in the M&A markets in 2023.

We predicted these key things:

• An increased in supply chain-related transactions

• Increase in big Pharma/healthcare related transactions

• More small deals, less large deals

• Expectations that technology and the need for operational efficiencies will drive deals

• Less M&A activity from Private Equity firms due to interest rate risks

What actually happened in the market?

Less large and mega deals; more small to mid-size deals

This year, the announcement of deals has shown a shift in the market from the pursuit of large deals to more small/mid-size market deals. This comes as a result of the global macroeconomic uncertainty especially mainly for corporations with international presence and the increase in regulatory scrutiny of large transactions. Large deals refer to transactions valuing $1 billion or more and "mega deals" for transactions of value $25 billion or more. PWC reported a 14% drop in the volume of $1billion+ deals since the last half of 2022 to date. On the contrary, the deal volume for deals of less than $1 billion only fell 6% over the same period.

As reported by S&P Global, only nine $ 10 billion+ deals totaling $164 billion have been announced thus far, compared to the 18 announced around the same time last year totaling $485 billion. Very few mega deals have been announced. The two largest deals announced thus far are a $23 billion automotive industry deal (VinFast Auto seeks to acquire Black Spade Acquisitions) and $19 billion energy deal (Oneok Inc. acquires Magellan Midstream Partners). The current climate has created a gateway for even more strategic and cost-effective small to mid-size transactions that have fewer risks and little to no regulatory scrutiny.

Very little deal activity from Private Equity firms

The markets are still tussling with inflation and high interest rates that are deterrents to PE firms who seek to partake in M&A activities. While little activity was already expected, the recent phenomenon of banks like SVB, Signature Bank, and Credit Suisse failing has led to a tightening of credit needed by PE firms for their M&A pursuits. Furthermore, inflation and high interest rates have put more pressure on PE firms to generate capital to meet existing obligations, so obtaining debt at current high interest rates for M&A deals would be the last thing on their agenda at this time.

Axios reported that global private equity-backed deal volume was down 50%, with the US and Europe having a 49% and 70% decline respectively. Until interest rates get better, PE firms are likely going to focus on strengthening and optimizing their existing portfolio, mobilizing their efforts in research and due diligence to source potential companies to later acquire, and identifying other values in deals that are not limited by the need for debt.

Increase in Big Pharma-related transactions, with mega-deals on the books

The Covid-19 era, despite its negative effects, was a major breakthrough for Big Pharma companies whose balance sheet improved drastically. They generated over $1.7 trillion in cash flow, which secured them with the advantage in pursuing many deals, including mega deals. Some of the largest deals announced this year have also been big Pharma/healthcare. Pfizer announced a $43 billion acquisition of Seagen. Other large transactions announced were Glencore's intended $23 billion merger with Teck Resources and Merck's completed acquisition of Prometheus Bioscience Inc. for $10.8 billion.

Last year, big Pharma transactions totaled $96.1 billion for the entire year. Pharma deals, including those listed above, totaled over $100 billion so far, and we are only at the mid-year point. This could be a record year for Big Pharma M&A with all the cash flow on hand for even more deals. Oncology and rare diseases are driving the majority of these M&A deals.

Strong tech-driven acquisitions and activity in the Technology sector

PWC reported that the Technology, Media, and Telecommunication (TMT) sector accounted for roughly 28% of all global deal volume thus far this year. The need for technological improvement and efficiencies will always exist, but OpenAI's ChatGPT has shifted the tech landscape to the point where more companies are finding ways to improve their capabilities with A.I. tools. With the rise in A.I. and the race to gain and maintain a competitive advantage in the market, many companies are establishing investments in A.I. at different rates and scales. Some examples of these AI-driven transactions include Databricks' $1.3 billion acquisition of generative A.I. startup MosiacML and Thomas Reuters' $650 million acquisition of CaseText for legal research. Other A.I. ventures come in the form of investment and funding.

Outside of A.I., there were acquisitions of software and tech platforms that can improve the acquirers' current business and open the gateway for entrance into new markets. A few instances of this were IBM's $4.6 billion purchase of Apptio, a provider of finance and IT management software and Visa's $1 billion cash purchase of Pismo, a digital banking platform operating in LATAM, EMEA, and APAC.

The TMT sector will continuously have M&A activity, but the rise in A.I. and competitive advantage brought on by leveraging more advanced technology will lead to more demand for acquisitions and investments in the sector.

Do we foresee an uptick in M&A activity later in the year going into 2024?

It's never easy to predict this outcome, but it's worth knowing that Q2's total deal value is $130 billion higher than Q1, which could signal a possible uptick in M&A deals for Q3 and Q4.

Constant shifts in global politics and macroeconomic pressures since last year, up to as late as today have not improved the confidence level of investors that there might be a possible uptick in M&A for the remainder of 2023. Recent conflicts in Russia, the lingering Russia/Ukraine war, and other global phenomena i.e. ongoing riots in France, are still issues that cast some doubt on the stability of economies for cross-border M&A ventures.

Inflationary pressures are still being felt by many countries whose businesses have to prioritize operational stability over major investments. The International Monetary Fund (IMF) believes that interest rates will return to pre-pandemic levels once inflation is curbed. Many analysts and investors predict the global M&A market will rebound heading into 2024. One thing that remains true is that the continuous rising of interest rates to curb inflation will affects M&A possibilities for private equity firms.

History in the M&A industry has shown the capability of the markets to bounce back to optimal levels for all players. While uncertainty still lingers, an analysis of the market after Q3 will give a better point of view point of how 2023 will end for M&A and what to expect early next year.

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