Global mergers and acquisitions performance rebounded in the third quarter, according to research from WTW’s Quarterly Deal Performance Monitor (QDPM). Based on share price performance, buyers outperformed the wider market by 3.9 percentage points for deals valued at over US$100 million between July and September.
The data, which was collected in partnership with the M&A Research Centre at Bayes Business School, also revealed the extent to which risk sentiment has fallen. Global deal activity is down significantly, with 210 deals completed in Q3, compared to 264 in the same quarter of 2021. However, WTW said the drop indicates a return to healthy pre-pandemic levels after 2021’s record-setting pace.
For the first time since the second quarter of 2019, there were no mega deals (valued at more than US$10 billion) closed during the quarter. Large deals (over US$1 billion) also fell significantly in the same period in 2021, at 49 vs. 67. The drop in larger deal activity suggests that acquirers are growing more cautious and avoiding the risks associated with more complex deals, as well as spending more time on due diligence in response to increased regulatory oversight, WTW reported.
Despite the challenges of rising interest rates, higher inflation, geopolitical tensions and a looming recession, M&A shows significant resilience, the report found.
“Markets have seen a ‘flight to quality’ as investors avoid high-yield and exotic assets, instead focusing on more stable and defensive businesses of sufficient quality to mitigate the short-term market concerns,” said Jana Mercereau (pictured above), head of corporate M&A consulting, Great Britain, at WTW. “M&A activity is likely to continue with a more cautious tone as we head towards the end of the year. The flight to quality reinforces the need for companies to set their sights on assets with a clear, well-articulated strategic rationale. Assets perceived as being ‘just okay’ are unlikely to transact in this lower-risk environment.”
Overall, only European acquirers underperformed their regional index, WTW reported. Asia-Pacific acquirers outperformed by 14.4 percentage points with 49 deals closed in the third quarter. North American acquirers outperformed by 4.5 percentage points with 98 deals closed. Dealmakers in Europe, who have been most heavily impacted by geopolitical and global financial uncertainty, underperformed their index by 6.7 percentage points with 51 deals completed in the quarter.
“For the first time in a generation we are faced with a volatile cocktail of surging inflation and rising interest rates, combined with increased regulatory intervention, applying further pressure to an already fragile global economy,” Mercereau said. “Despite these major geopolitical and financial headwinds, and the potential for further shocks still to come, M&A is continuing apace.
“Even though financial conditions have tightened sharply through the first nine months of 2022, plenty of dry powder is still available, with some investors seeing current conditions as a buying opportunity and PE firms needing to deploy large amounts of cash by year-end. We expect competition for much-needed technology, ESG priorities, supply chain resilience and recession-proof industry deals to drive dealmaking into 2023 as companies navigate current market uncertainties and plan for long-term growth.”