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.
The SEC scored record penalties in fiscal year 2022
Many were anticipating an enforcement crackdown by the Securities and Exchange Commission (SEC) in the first full fiscal year under chair Gary Gensler and enforcement director Gurbir Grewal, and those expectations were certainly met
In fiscal year 2022, the SEC recovered its highest recorded sum of monetary penalties—US$6.4 billion in civil penalties, disgorgement and prejudgment interest. This was almost double the US$3.9 billion collected in fiscal year 2021, and while the volume of enforcement actions was lower than during pre-pandemic years, 2022 also saw a 9 percent increase over the prior fiscal year.
Of this record haul, US$2.8 billion was attributable to public company and subsidiary actions, a full US$900 million higher than in the previous year, per an analysis by Cornerstone Research. And in another record, almost all of the 75 public company and subsidiary defendant settlements during this period involved a monetary penalty, according to an analysis by Cornerstone Research. Of the 3 percent that were not fined, the SEC reported that the entity had cooperated in about two-thirds of these cases. These results call into question the value of cooperation under the SEC's current administration.
In terms of the highest number of actions taken, investment advisers and investment companies were the primary target, with 174 cases, followed by broker-dealers, with 132 actions.
In yet another first for the agency, charges were brought against a registered investment adviser for failing to disclose a conflict of interest arising from its staff's ownership of the sponsors of special purpose acquisition companies (SPACs) being pitched as investment products.
A clear message
It came as no surprise that, in its enforcement round-up for the year, the SEC chose to highlight actions against 16 broker-dealers and one affiliated investment adviser for failures to maintain and preserve certain text message communications. These settlements alone were valued at about US$1.2 billion.
This has been a point of focus for the securities watchdog, which is concerned about the use of unauthorized personal mobile devices for off-channel private communications, in violation of federal securities laws. The move is a warning shot for firms engaged in these behaviors and those failing to put in place adequate policies to prevent such abuses.
Cryptocurrency cases also picked up the pace, with the SEC drawing attention to its first action against a crypto lending firm and an insider trading case involving digital assets. These are just the tip of the iceberg.
In 2022, the agency announced plans to nearly double the headcount of the Enforcement Division's Crypto Assets and Cyber Unit, previously simply known as the Cyber Unit. And, in December 2022, charges were brought against Samuel Bankman-Fried for "orchestrating a scheme to defraud equity investors in FTX Trading Ltd. (FTX), the crypto trading platform of which he was the CEO and co-founder"—a headline-grabbing incident and one surely to keep the SEC's crypto enforcement activities in the limelight in the months ahead.
SEC Chair Gary Gensler has certainly followed through on his promise to lead a more aggressive SEC. The agency has not only committed to pursuing violations wherever and however they occur, the SEC Enforcement Director Gurbir Grewal also testified in 2022 that he sees "robust enforcement, robust remedies, and robust compliance" as a priority.
The writing is very much on the wall. The SEC broke a lot of records in 2022 and there is every possibility it will do so again in 2023.
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