Chinks of light for M&A

The economic environment in 2022 was particularly unfavourable for M&A. The war in Ukraine, soaring energy prices and rising inflation shook investor confidence, while tightening monetary policy weighed on the ability of companies to finance transactions. Resilient in the first half of the year, M&A activity slowed down significantly in the second half.

The drop in equity markets in 2022 meant that the proportion of stock transactions relative to cash ones declined. Deals paid in cash accounted for 76% of the total in 2022 by value of global deals compared with 67% in 2021. The increase was more marked in the US, where 83% of transactions were paid for in cash in 2022, compared to 60% in 2021. Yet the fast rise in interest rates from mid-2022 on hurt buyers’ ability to fund cash deals.

The volume of deals held up better in the US than in Europe in H1—thanks to mega deals (over USD40 bn) in the tech sector—before a significant slowdown in H2. Whereas US companies kept buying in Europe, the reverse was not the case as the strength of the USD held back European buyers.

With plenty of dry powder, private equity firms continued to increase their share of M&A deals in 2022. Trends in the US and Europe were broadly similar, with 37% of deals in Europe involving a private acquirer, the highest level in 24 years.

The average premium paid relative to the price per share of a target company one month before a deal announcement rose continually from 2018 to 2022, reaching around 40% last year. The increase was stronger in Europe, where average deal premiums returned to the previous peak reached in 2016.

Economic uncertainties could continue to be a hurdle for M&A globally in 2023, with the increasing cost of funding and an economic slowdown pushing buyers to focus more on smaller deals.

However, the economic downturn early this year may provide opportunities for strategic buyers to look at companies with strong growth prospects that are now trading at cheaper valuations than before. Companies may turn to M&A as a way to protect elevated margins. In addition, the stock of dry powder that private-equity firms have available should keep supporting M&A, especially if economic uncertainties progressively fade. Finally, European buyers looking to the US for acquisitions should be helped by the euro’s rebound against the USD.