Global merger and acquisition activity experienced a significant decline in the first half of 2023 due to rising interest rates and economic uncertainty, according to research conducted by WTW’s Quarterly Deal Performance Monitor (QDPM) in collaboration with the M&A Research Centre at The Bayes Business School.
The report revealed that the number of completed M&A deals valued over $100 million fell worldwide during the first half of 2023, with a total of 280 deals compared to 441 deals during the same period in 2022. This represents a 37% drop in volume, marking the lowest figure for the first half of a year since 2009.
The challenging macroeconomic conditions are particularly evident in the North American market, which experienced a continuous decline in deal volumes for six consecutive quarters, WTW reported. From a near all-time high of 173 deals in the third quarter of 2021, the number of deals dropped to just 61 between April and June 2023.
In addition to the decrease in the number of M&A deals, the performance of acquirers who completed transactions in 2023 also underperformed the market by -2.1 percentage points (pp). This decline follows a positive performance of +4.4 pp in the second half of 2022. However, despite the ongoing volatility, global M&A still achieved an overall positive performance of +1.4 pp over the last 12 months.
“A perfect storm of higher inflation, interest rates, capital costs and greater regulatory scrutiny, combined with major geopolitical headwinds and a banking crisis, have triggered a steeper drop-off in M&A activity than anticipated by the market,” said Jana Mercereau (pictured above), head of corporate M&A consulting for Great Britain at WTW. “Buyers have had to shift gears to adapt to a more cautious M&A environment, although deal conversations have continued throughout this period of uncertainty. With these disruptive trends expected to continue into the second half of 2023, potential buyers will be kicking the tyres a bit harder as they seek deals to address strategic priorities, expand into new markets and fill capability gaps.”
Mercereau also said that buyers have had to adjust to a more cautious M&A environment, but deal discussions have continued amidst the uncertainty. As disruptive trends are expected to persist into the second half of 2023, potential buyers will approach deals with increased scrutiny as they seek strategic priorities, market expansion, and capability enhancement.
The performance of M&A deals in the first half of 2023 would have been even worse if not for the Asia-Pacific (APAC) region, where buyers continue to outperform the rest of the world, the report found. APAC acquirers surpassed their regional index by +10.9 pp, although the region still experienced a 25% drop in deal volume compared to the first half of 2022.
On the other hand, North American acquirers underperformed their index by -5.9 pp, while European dealmakers underperformed their regional index by -8.3 pp.
Additional findings from the WTW data include a decline in mega deals, with only three closing in the first half of 2023 compared to 12 deals in the same period of the previous year. The second quarter of 2023 saw North American acquirer performance at -10.3 pp, the second-worst on record, while European acquirer performance during the last three months reached a record low of -10.8 pp.
Intra-regional deals showed an increasing trend for three consecutive quarters compared to cross-regional deals. Similarly, intra-sector deals experienced a significant jump from 57% in the first quarter of 2023 to 67% in the latest quarter, indicating a clear preference for deals closer to home.
“When inflation stabilizes and credit markets reopen, we expect deal appetite to increase considerably fuelled by pent-up demand with digital transformation, portfolio rebalancing and ESG issues continuing to be key drivers,” Mercereau said. “Larger deals will remain tough to pull off due to increasing antitrust and regulatory pushback. Instead, companies are more likely to pursue small to midsize deals, which are easier to complete than megadeals and lower risk in today’s difficult financing environment. But in the race to acquire – whatever the size of deal – due diligence that is faster, deeper and better focused, combined with a plan for successful integration, will prove even more critical in a volatile market.”
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