Global transactions suffered a record slump in the second half of this year as rising interest rates and economic uncertainty brought an abrupt end to a period of frenetic activity.
Mergers and acquisitions worth $1.4 billion were announced in the six months to December, according to data provider Refinitiv, down from the $2.2 billion agreed in the first half 2022. This was the largest change, from one six-month period to the next, since records began in 1980.
The overall volume of deals closed around the world in 2022 was down 38% from 2021, the biggest year-over-year decline since 2001. Still, it was at high levels by historical standards, above the global totals seen in 2016 and 2017.
The slowdown was the result of sharp increases in interest rates, in the wake of rising inflation and the war in Ukraine, which undermined confidence in global markets and increased the cost of financing. Junk bond markets all but froze, making it difficult for private equity firms to fund deals.
Mark Sorrell, co-head of global M&A at Goldman Sachs, called 2022 “a tale of two halves” as a lack of cheap funding stalled the M&A market after the summer.
The number of mega-deals worth more than $10 billion fell sharply during the year, with 25 signings in the first half but only 11 in the second.
“The financing of mergers and acquisitions exists, but it is a lot [higher] cost and it is not available to all issuers,” Sorrell said.
The M&A slowdown caps a frenzied period in 2021 when deals hit record highs, fueled by coronavirus pandemic-era stimulus and emergency rate cuts. Still, the total volume of transactions this year was higher than in 2020.
“I didn’t go into 2022 thinking it would be 2021,” said Steve Arcano, global head of transactions practice at law firm Skadden. “2021 has really been an exceptional year, you can’t have record years every year”.
Direct lenders such as Sixth Street Partners have stepped into the vacuum left by the banks, providing billions of dollars in debt financing to support deals such as Advent International’s takeover of satellite operator Maxar Technologies.
In some cases, investment firms have bought debt to fund their own deals, such as Elliott Management’s purchase of bonds backing its takeover of TV ratings provider Nielsen.
Banks that had agreed to fund dozens of mega-buyouts by private equity firms on more benign terms remain dependent on the money on the terms they agreed to underwrite the deals. This limited their ability to finance new transactions.
Elon Musk’s acquisition of Twitter for $44 billion was the most high-profile deal to turn sour, leaving banks waiting until next year to offload $12.7 billion in debt related to the purchase.
This year, the number of transactions fell by 39% in the United States and Europe. In the Asia-Pacific region, it fell by 33%.
Traders have been discouraged by heightened regulatory scrutiny, particularly in the United States where antitrust watchdogs have vowed to crack down on private equity firms and big tech. It has raised doubts about the completion of some agreed deals – including the year’s biggest deal, Microsoft’s $75 billion deal to buy video game maker Activision Blizzard.
The sale of sports clubs is an area where dealmaking has remained dynamic. A record $4 billion deal for the NBA’s Phoenix Suns and Mercury basketball teams in December was the latest in a string of record-breaking professional sports team sales this year, which included the league’s Denver Broncos. national football and Chelsea FC and AC Milan.
Private equity-backed buyouts have slowed, but many companies have raised significant funds that have yet to be fully deployed. Some are making small acquisitions and hoping larger takeovers will become easier next year if debt markets open up.
Private equity groups are also taking longer to deploy their funds, according to Christian Sinding, chief executive of EQT. “The typical cycle has been three years, recently it has been closer to two years because it shrinks during very hot spells, but it could now expand again beyond three years,” said he declared.
Alison Harding-Jones, head of mergers and acquisitions for Europe, the Middle East and Africa at Citigroup, expected deals in 2023 to be “primarily driven by corporate activity,” as companies with healthy balance sheets were looking to grow.
“People are very busy. High quality strategic transactions, I think will be the definition of the first and second quarters of next year,” she said.
Some advisers said 2023 could also be a year of two halves, as business leaders started accepting offers at lower valuations.
“At some point in the year. . . we’re going to start building again,” said Eric Swedenburg, a partner at law firm Simpson Thacher. “It won’t be straight out of the gate in January. I don’t think we’re off the hook yet.