Dealmaking slips by almost a third in 2022 marked by volatility, inflation

NEW YORK – Stubbornly high inflation, soaring borrowing costs and geopolitical uncertainty hindered dealmaking in 2022, sending global mergers and acquisitions (M&A) activity down by almost a third compared with 2021’s record haul.

Companies announced US$3.5 trillion (S$4.7 trillion) worth of deals in 2022, according to data compiled by Bloomberg, striking transactions to bulk up existing businesses, push into new sectors or reorganise operations against a volatile backdrop of slumping equity markets and forceful antitrust actions.

Mega deals announced early in the year were replaced by jitters about getting M&A transactions over the finish line, with monthly deal activity plummeting by almost half from May to June. The volumes have yet to recover.

“It is really the tale of two years,” said Ms Melissa Sawyer, global head of Sullivan & Cromwell’s M&A group. “When we started 2022, people were churning out deals left and right and Spacs (special purpose acquisition companies) were still a thing. Then the landscape for M&A changed dramatically.”

The year started off on a high note when

Microsoft agreed in January to buy video game publisher Activision Blizzard

for US$69 billion in the biggest deal since 2019. For a moment, 2021’s gangbuster performance – which saw a record US$5 trillion of deals announced – looked set to continue.

But sentiment quickly started to fizzle. In February, Russia invaded Ukraine, and the next month, the US Federal Reserve embarked on its most aggressive interest rate-raising spree in decades, bringing the overnight rate to the highest level since 2007.

Billionaire Elon Musk’s pursuit of Twitter

also brought a dose of uncertainty to the dealmaking community, tying up advisers and lenders for months as he flip-flopped on taking the social media network private. His US$44 billion buyout, which eventually closed in October, left a Morgan Stanley-led cohort saddled with about US$13 billion of debt financing.

As ever, volatility was the true menace to dealmaking, and to the fragile market for initial public offerings (IPOs). The CBOE Volatility Index, known as the VIX, has for the most part stayed well above its long-term average in 2022, peaking at 36.45 in March.

When the IPO window slammed shut, it removed an exit option for investors and a funding avenue for cash-burning companies that seemed unstoppable a year earlier. Only US$24 billion has been raised in United States IPOs in 2022, the lowest since 2009, according to data compiled by Bloomberg. The backlog could lead to more acquisitions of start-ups in 2023.

Dealmaking among private equity firms followed a similar trajectory to public company M&A. The year started with a jumbo deal: the US$16.5 billion buyout of Citrix Systems by Vista Equity Partners and Elliott Investment Management. After that, reality caught up, as inflation started weighing on firms’ operating costs and margins, monetary tightening around the globe made buyouts more expensive and banks got stuck with hung debt. Buyout volumes fell in every quarter of the year, according to data provider Preqin.

“I thought it would be tough but didn’t think it was going to be that challenging,” said Mr Kristoffer Melinder, managing partner at Nordic Capital. “The problem is price and for that to settle, you need lower rates – let’s call it what it is.”

While challenging financing markets meant several private equity transactions fell apart or got postponed, they also forced sponsors to get more creative. Some opted to use more equity to finance deals, while others got rid of a debt component entirely.

Even without easy financing, buyout firms are still sitting on record amounts of dry powder. Plummeting public markets could provide opportunities once boards get comfortable with their new valuations. In the meantime, companies are selling assets.

There could be more of that in the consumer products industry, said Mr Jim Langston, co-leader of US M&A at Cleary Gottlieb Steen & Hamilton. “We think there are a lot of opportunities there to use spin-offs to separate high-growth from low-growth assets and achieve multiple re-ratings.”

This is particularly true in an environment “where it is tougher than normal to do divestitures because of regulatory pressures, equity market volatility and financing disruption”, he added.

Whether 2023 can surpass 2022 will hinge on when markets stabilise enough for debt financing to become more readily available and postponed situations to relaunch.

A lot will also lie in the hands of antitrust enforcers: The US Federal Trade Commission is

seeking to block Microsoft’s acquisition of Activision Blizzard,

with the agency’s trial not set to start until August 2023.

Still, advisers are hoping that activity will start to pick back up in 2023 – especially after the first half – and that biotechnology giant Amgen’s US$27.8 billion deal to buy Horizon Therapeutics, announced last week, could be a harbinger of big deals to come.

“We have now had a couple of quarters to digest what has happened,” said Mr Brian Haufrect, co-head of Americas M&A at Goldman Sachs Group. “It feels like we are finding more solid ground. The financing markets have been functioning a bit better. All the ingredients for M&A are still there.” BLOOMBERG