Although the record-breaking deal activity of 2021 spilled over into 2022, headwinds in the first quarter developed into a significant slowdown during the rest of 2022, with an expectation of continued slowness as we enter 2023
This time last year, the US M&A market continued to be busy with deals in the pipeline from 2021, both deals proceeding to signing, and signed deals in the process of moving to closing.
However, it was evident from early in 2022 that new M&A activity was going to be down significantly from 2021. Cracks were already beginning to show the year before, as the Federal Reserve's language took a more hawkish turn. Talk of inflation being "transitory" shifted. By March, the Fed had made its first interest rate hike in four years. By mid-year, the S&P 500 had entered a bear market.
Since first tightening its monetary policy, the central bank has raised the federal funds target rate by a full 425 basis points (bps). This is the fastest pace of change in modern history. By December 2022, the brakes were being pumped a little less, rounding off the year with a 50 bps increase.
Nevertheless, Fed chair Jerome Powell's language remained resolute at a December 14 press conference announcing the increase: "We have covered a lot of ground, and the full effects of our rapid tightening so far are yet to be felt. Even so, we have more work to do."
Officials forecast up to a total three-quarter point more in interest rate increases this year—the Fed's policy extending longer than many had anticipated. Some are still hopeful that a pivot is not far away. Bond markets have been calling the Fed’s bluff with two-year US Treasury yields peaking in November and dipping below the federal funds rate.
As inflation shows signs of rolling over and economic growth stalls, opinion is divided over what 2023 holds in store—a soft landing or a hard landing. Even if the Fed eventually walks back its recent comments with a course correction, that would suggest that it has overshot the mark.
What is clear is that the first half of 2023 will not carry with it the spillover momentum seen in early 2022, and some investors are bearish on how 2023 will fare. Nevertheless, another camp remains cautiously optimistic. Taken as a whole, 2022 put in a solid performance as compared to historic performance. The real story, however, is that deal activity trended down with each successive quarter as valuations fell, corporate equity issuances became less attractive and debt financing was increasingly costly and less accessible.
As the articles in this report demonstrate, we do not see an early return to a busy M&A market. Opportunistic strategic M&A will dominate until questions regarding a recession are answered and confidence in the stock market returns.
US M&A in review: Momentum can only take you so far
M&A started strong in 2022 with robust deal activity and megadeals dominating the landscape that was largely the result of unprecedented spillover from 2021. But then, things took a turn and deals stalled in the second half of the year, as shifting macro-economic conditions began to take hold.
The US private equity (PE) market in 2022 aligned overall with the broader M&A trend—activity eased off considerably, year-on-year, but remained above historic levels—and like the M&A market at large, it tailed off as the year progressed, but what does this mean for the year ahead?
With some rare exceptions—namely in the oil & gas and energy sectors—deal activity was down in 2022 as a sense of fatigue set in following a prolonged period of high deal activity and as inflation and rising interest rate concerns took center stage.
A flurry of activity early in 2022 sees real estate outperform
Real estate has historically shown resilience during challenging economic periods and is considered a reliable hedge against inflation—but not all assets are created equal, and dealmakers were highly selective in the transactions they pursued in 2022.
Antitrust scrutiny intensifies as DOJ and FTC step up enforcement
The federal government continues to aggressively pursue its antitrust agenda, seeking to block several headline deals, rejecting remedy offers, increasing filing fees for the largest deals and setting out new guidelines
Merger filings in the US remain above historical averages and enforcement continues to be aggressive. The pace of merger filings under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act—which requires detailed filings about larger mergers and acquisitions to be provided to the Federal Trade Commission (FTC) and the Department of Justice (DOJ) before they occur—fell in 2022, but still surpassed historic levels. According to White & Case's Global Antitrust Merger StatPak, HSR filings in the first half of 2022 were 47 percent above the ten-year trailing average.1
The FTC and DOJ Antitrust Division have continued their aggressive posture toward merger enforcement. The antitrust agencies have implemented policy changes that have created an uncertain regulatory environment. Early termination, for example, remains "temporarily" suspended until further notice. Since the suspension in February 2021, all reportable deals are subject to the standard 30-day waiting period. This is prompting some dealmakers to submit their HSR filings early (and on term sheets or letters of intent) to stay ahead of schedule.
Notably, on December 29, 2022, President Biden signed into law the Consolidated Appropriations Act, 2023, which includes the Merger Filing Fee Modernization Act of 2022 (Merger Filing Fee Modernization Act).
The Merger Filing Fee Modernization Act, among other changes, will increase US merger filing fees for the largest transactions.2 While some transactions will see a drop in US filing fees, the largest deals (any deal with a total value of US$5 billion or more) will see a nearly ten-fold increase, to US$2.25 million. Companies pursuing larger transactions should consider commercial solutions, including whether to split the HSR filing fee or to reconsider filing on a letter of intent versus waiting for more deal certainty.
Deals of all sizes
Private equity deals and transactions in the healthcare and technology sectors continue to attract heightened antitrust scrutiny, and it is not only mega-cap deals that are being pursued. Both the DOJ and the FTC investigated and challenged several transactions of all sizes and deal values across industries in 2022. The antitrust agencies also announced a strong preference for challenging transactions in court instead of pursuing settled remedies, suggesting an increased appetite for litigation.
The US agencies have also demonstrated an increased interest in challenging vertical transactions. That was certainly true for the largest M&A deal of the year. On December 8, 2022, the FTC issued a complaint to block Microsoft from acquiring video game developer Activision Blizzard, alleging that the US$69 billion tie-up would suppress competitors to its Xbox consoles and its subscription content and cloud-gaming business. Activision produces some of the world's most popular video game titles, including Call of Duty, which are currently available on a range of gaming platforms. Microsoft intends to fight the lawsuit.
The FTC has sought to block/prevent other vertical mergers. In January 2022, for example, the FTC sued to block Lockheed Martin's US$4.4 billion proposed acquisition of Aerojet, which the parties subsequently abandoned.
It's not all been smooth sailing for these challenges, however. In September 2022, the administrative law judge dismissed the FTC's complaint against DNA sequencing provider Illumina's US$7.1 billion vertical acquisition of Grail, which was brought in March 2021. The FTC has since appealed the case.
Similarly, the DOJ's challenge to UnitedHealth's bid to buy vertical Change Healthcare, filed in February 2022, was also dismissed by a judge in September and the deal ultimately closed in October. Nonetheless, the DOJ subsequently announced its intention to appeal the verdict.
Other losses include DOJ's challenges to U.S. Sugar's acquisition of Imperial Sugar and Booz Allen Hamilton's acquisition of EverWatch.
The DOJ did have a win on October 31, 2022, however, when the court blocked publisher Penguin Random House's proposed US$2.2 billion takeover of Simon & Schuster, with the parties abandoning the deal.
Increased enforcement, combined with the agencies' reluctance to approve remedies, has created an uncertain environment where commercial parties should be increasingly prepared to litigate mergers.
Merger Guidelines—looking ahead
One area to watch in 2023 is the release of the new merger guidelines, the key framework for the US antitrust agencies when reviewing transactions.
In January 2022, the DOJ and the FTC announced plans to revise the 2010 Horizontal Merger Guidelines and the 2020 Vertical Merger Guidelines. The FTC and DOJ launched a joint review of the guidance in early 2022 and were initially expected to release the new guidelines before the end of the year. This is a potential game changer and could force dealmakers to adjust their calculus when reviewing potential transactions.
The ramping up of antitrust enforcement in 2022 may well be a sign that the guidelines will significantly alter the existing frameworks for assessing mergers.