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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

west village ivy building

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


What’s next for US M&A?

Five factors that will shape dealmaking over the coming 12 months

3 min read

As predicted in our previous M&A report, 2022 has not lived up to the runaway performance of 2021. As activity—still at impressive levels considering everything that has been thrown at the deal market—takes a breather, we consider five fundamental trends that may play out over the coming months.

1. Rates and financing costs to increase

The increasing interest rate environment has, and will inevitably continue, to make deal financing more costly as spreads widen. Leveraged loans and high-yield bonds are at the riskier end of the curve, and PE firms rely heavily on this financing. It is likely that direct lenders will step in to pick up some of the slack left by more cautious capital markets. Either way, buyers dependent on acquisition financing will need to adjust for this accordingly—potentially, by using their cache of dry powder to write larger equity checks.

2. Acquirers will capitalize on attractive multiples

It is reasonable to expect that M&A activity will continue with a more cautious tone, as it was headed toward the end of the second quarter. However, deals will continue. Companies that set their sights on assets and have a clear, well-articulated strategic rationale for pursuing those deals will press ahead with the support of their shareholder bases. PE has ample dry powder at its disposal and has proven adept at capitalizing on market dislocations in the past. Indeed, the markdown in EBITDA multiples will make many opportunities all the more compelling over the next six to 12 months, and acquisitions made during this period promise to deliver when valuations recover.

It is reasonable to expect that M&A activity will continue with a more cautious tone, as it was headed toward the end of the second quarter. However, deals will continue.

3. Going deeper on due diligence

There is no escaping the fact that risk sentiment has cooled. Acquirers are spending, and will continue to spend, more time on their due diligence processes, prepping on the regulatory side, forward planning for any potential issues that may arise and justifying their investment theses before bringing deals to their executive or investment committees for sign-off. Supply chain resilience will continue to be a focal point, and ESG will be further integrated into evaluations. Patient, steadfast bidders with deeper insight into their prospective deal targets will be rewarded for these efforts.

4. More hold-ups and aborted deals

This year has presented some truly blockbuster deals, from Microsoft's US$75.1 billion offer for Activision Blizzard, to the proposed US$71.6 billion Broadcom-VMware merger, and Elon Musk's bid for social media platform Twitter, valued at US$41.3 billion.

All three hit their own snags or show signs that they may not follow through. The Activision deal is facing scrutiny from the UK's Competition and Markets Authority (CMA), while Broadcom must wait for EU competition authorities to green-light the purchase, which is likely to take some time and may ultimately be blocked with mitigating conditions. And Elon Musk is seeking to walk away from the Twitter deal, which has landed that transaction in the Delaware courts. From regulatory hoops to further market volatility impacting bid-ask spreads, there is potential for more such deals to face complications.

5. Overseas opportunities to emerge

Amid the risk-off pivot and the higher rate outlook, the US dollar is the strongest it has been in 20 years, to the detriment of other major currencies. The euro has fallen to parity with the greenback, down approximately 20 percent over the past year. While a strong dollar is slowing foreign revenues and profitability at US multinationals, buyers with lots of liquidity will be incentivized to look overseas for potential buy opportunities. Not only have valuations come down, US acquirers can benefit as their cash stretches that much further when shopping for assets than was the case 12 months ago.

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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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