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Reality check: US M&A H1 2022

What's inside

US deal activity saw an annual decrease in H1 of this year, but remains buoyant compared to pre-pandemic standards

M&A proves its resilience after a year of excess

US M&A deal levels remain robust, despite dropping from historic highs set in 2021

US M&A activity eased off in the first half of 2022 following an annus mirabilis for US M&A in 2021. Total value slipped to US$995.3 billion, a 29 percent year-on-year fall, though this is consistent with dollar volumes seen before the pandemic and so remains healthy by historic standards. Deal volume also fell, by 21 percent to 3,818 transactions. While this also remains above average, there was a material softening in the frequency of deals moving through Q2, which saw a quarter-on-quarter drop of 22 percent to levels last seen in Q1 2020, when the market was just beginning to recover from the initial shock of the pandemic. 

A lot has happened this year to test acquirers’ nerves. Inflation concerns had already begun to set in before the war in Ukraine started. The conflict catalyzed further unease in capital markets as well as exacerbated supply chain troubles which have, in part, contributed to inflationary pressures. The S&P 500 officially entered a bear market in mid-June, and the Federal Reserve has embarked on a monetary tightening program to bring prices under control, leading to an increase in financing costs. 

Regulations are another consideration. The SEC has taken the SPAC market to task, proposing accountability for deal parties and intermediaries for inflated projections. This type of transaction ground to a standstill in Q2 this year, as participants digested their risk exposure and the implications of the regulator’s proposals weighing on overall M&A volume. More recently we have seen some truly innovative SPAC structures that have the potential to re-stimulate interest in these deals. 

For the most part, the US M&A market has stood up impressively to everything that has been thrown at it, which alone is solid grounds for optimism. Despite technology stocks being sold off heavily in equity markets, the sector has once again outperformed on the M&A front as companies and PE sponsors, who remain heavily armed with dry powder in spite of the more challenging deal financing conditions, continue to be attracted to innovation. 

The fall in price-to-earnings ratios in the public markets and EBITDA multiples in private markets mean that, all else being equal, acquisitions are more attractive today than they were a year ago. Naturally, investors remain cautious as they closely watch how inflation plays out, the Fed response and the impact of those actions on underlying economic growth. However, the second half of 2022 has the potential to reclaim some of the confidence lost in recent months.


US M&A settles back down

Deal value in the first half of 2022 could not match the record-breaking level of activity in 2021


Private equity firms battle headwinds in H1

Despite facing economic and regulatory hurdles in H1, PE dealmaking remains resilient, and looks set to reach its second-highest value on record

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SPACs are overcoming expectations

After a series of rollercoaster years for the SPAC market, investors and sponsors are finding ways to improve deal integrity

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In Focus

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SEC: The watchdog bares its teeth

The SEC has followed through on promises to increase enforcement

3 min read

These enforcement actions underscore that the SEC is not waiting for the new ESG rules in order to start scrutinizing ESG-related disclosures by public issuers and regulated entities.

The Securities and Exchange Commission (SEC) has followed through on its much publicized intention of more aggressive enforcement. For instance, in June, the regulator brought an accounting fraud action that included a clawback of a CEO's compensation, notwithstanding that the CEO did not have a role in the stated misconduct. Through this action, the SEC has made it clear that when there is a restatement of a public company's financial statements, it will exercise its powers under the Sarbanes Oxley Act to claw back compensation, even if a CEO or CFO is not directly charged with misconduct. Such compensation includes equity-based incentives and the profits from sales of a company's stock during the restatement period. This is known as a SOX 304 clawback and this action signals a significant broadening of this remedy, as the SEC is not requiring misconduct by senior management.

Admissions have also become a focal point. In December, rather than settle on a "neither admit nor deny" basis, a broker-dealer admitted to certain record-keeping violations in an SEC settlement. In this matter, certain employees communicated about securities business over their personal devices using, for instance, text messages and WhatsApp without maintaining and preserving those communications. An admission is significant because it can sometimes be used by private securities litigation attorneys to get past the motion to dismiss stage and into discovery. Notably, there is no private right of action for the type of violation this broker-dealer admitted to. So, while the entity admitted to the failing, it could settle without a significant risk of private litigation. It remains to be seen, however, whether a company will admit to a regulatory breach that also leaves it exposed to private action.

SPAC watch

Regarding the impact of enforcement on M&A activity specifically, SPAC markets have been especially sensitive to a more hawkish SEC. The heightened focus of the Enforcement Division on de-SPAC transactions has contributed to these deals slowing, as market participants in de-SPAC transactions digest their enforcement risk exposure and prepare for new SEC rules.

The rise of ESG disclosure scrutiny

One of the biggest areas of ongoing development, meanwhile, is in ESG enforcement actions. In April, the Enforcement Division's Climate and ESG Task Force brought its first enforcement action against a mining company for making false and misleading statements in violation of the antifraud and reporting provisions of the US securities laws. The misleading statements were delivered at an investor presentation and made in the company's sustainability reports and SEC filings. They related to the safety and risk management of a dam prior to its fatal collapse.

The following month, the Enforcement Division's Climate and ESG Task Force brought a second action against an investment advisor for misstatements and omissions relating to ESG considerations when making investment choices for a number of mutual funds under its management. The investment advisor implied in various statements that all investments in the funds had undergone an ESG quality review, despite this being untrue. These enforcement actions underscore that the SEC is not waiting for the new ESG rules in order to start scrutinizing ESG related disclosures by public issuers and regulated entities.

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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.

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