The data, compiled in collaboration with the M&A Research Centre at Bayes Business School, also reveal the extent to which risk sentiment has cooled. Global deal activity is significantly lower in the third quarter of 2022, with 210 deals completed compared to 264 in the same quarter of 2021; however, this indicates a return to healthy pre-pandemic levels following the record-breaking pace of 2021 driven by exceptional conditions.
For the first time since the second quarter of 2019, no megadeals (valued at more than $10 billion) were completed in the previous quarter. Large transactions (over $1 billion) were also significantly lower than in the same period in 2021. (49 versus 67). This drop in larger deal activity suggests that acquirers are becoming more cautious, avoiding the risks associated with more complex deals and devoting more time to their due diligence processes in response to increased regulatory scrutiny in several key markets.
Despite the perfect storm of challenges confronting the market — rising interest rates, higher inflation, geopolitical tensions, and a looming recession — M&A is demonstrating significant resilience.
"As we approach the end of the year, M&A activity is likely to remain more cautious." The flight to quality emphasizes the importance of companies focusing on assets with a clear, well-articulated strategic rationale. Assets deemed 'just okay' are unlikely to transact in this lower-risk environment, according to Smithson.
Only European acquirers underperformed their regional index overall. With 49 deals closed in the third quarter of 2022, Asia Pacific acquirers outperformed by +14.4 percentage points. With 98 transactions completed between July and September, North American acquirers outperformed their index by +4.5 percentage points. With 51 completed deals, European dealmakers underperformed their index by -6.7 percentage points, owing to geopolitical and global financial uncertainty.
"For the first time in a generation, we are confronted with a volatile cocktail of surging inflation and rising interest rates, combined with increased regulatory intervention, putting additional strain on an already vulnerable global economy." Despite these significant geopolitical and financial headwinds, as well as the possibility of additional shocks in the future, M&A activity is continuing apace.
"Even though financial conditions have tightened sharply in the first nine months of 2022, there is still plenty of dry powder available, with some investors viewing current conditions as a buying opportunity and private equity firms needing to deploy large sums of cash by year's end." We anticipate that dealmaking in 2023 will be driven by competition for much-needed technology, ESG [environmental, social, and governance] priorities, supply chain resilience, and recession-proof industry deals as companies navigate current market uncertainties and plan for long-term growth," Smithson concluded.