- Global mergers & acquisitions (M&A) down by 27% compared to SPAC-induced H1 2021, but up 35% compared to average of previous cycle (2015-19)
- Shift to M&A “friend-shoring” sees increase in deals among friendly countries
- Technology sector dominates with nearly a third of total activity
Despite major geopolitical and financial headwinds, global M&A activity in H1 2022 has been resilient, according to analysis of M&A data by EY. With 2,274 deals of a total value of US$2.02t, M&A in H1 2022 may have seen a drop compared to this time last year (down 27% by value and 18% by volume), but activity is up compared to the average of the last M&A cycle (up 35% and 13% respectively).
According to analysis by EY, the nature of cross-border deals is changing to reflect geopolitical tensions on the world stage. While cross-border transactions levels in H1 have decreased (24% in 2022 vs an average of 30% over 2015-19), the share of cross-border deals among closely affiliated countries has increased (51% in 2022 compared to an average of 42% over 2015-19). The analysis finds that investment from China into the US has fallen from US$27b at the highpoint in H1 2016 to US$1.9b, while North American investment into Europe have increased from US$60b to US$149b over the same period.
Andrea Guerzoni, EY Global Vice Chair – Strategy and Transactions, says:
“Coming off the SPAC-induced highs of the first half of 2021, M&A activity was always going to go through a correction. But what we see is that unlike when COVID-19 hit and deal activity came to a standstill, CEOs are still trying to look through the fog and are pursuing transactions that will help position their organizations for future growth. On the global stage, while there is still a strong appetite for cross-border deals, CEOs are more selective in who they do deals with, preferring to ‘friend-shore’ their operations and pursue transactions within friendly pockets rather than applying a truly global approach.”
India and the Technology sector reign supreme
Following the US (US$900b) and China (US$175b), which traditionally top the table of most active M&A markets, India has had an extremely active start to the year with the combined value of its outbound, inbound and domestic deals jumping to US$128b and increase of 215% compared to the average of the last deal cycle (2015-19). According to EY analysis, as well as a burst of domestic M&A (US$107b vs. an average of US$21.5b over 2015-19), H1 2022 also saw an increase of Indian-owned companies buying foreign-owned assets (US$6.2b vs. US$2.3b over the average of the last deal cycle (2015-19).
Looking at sector performance, once again Technology drove global M&A in H1 2022. While the US$627b of M&A activity was down 20% from the record 2021 levels (US$789b), it still accounted for nearly a third (31%) of global M&A activity. Deals focused on technology targets are now at double the level of the previous cycle (up 95% against the 2015-19 average of US$322b). Conversely, the EY analysis finds that the Life Sciences sector continues to underperform, despite the recent health crisis. The sector has recorded US$111b in deals so far in 2022 (down 58% year-on-year and 48% versus the 2015-19 average). The Consumer sector that has traditionally been an active M&A market has also seen a 27% decline in activity compared to H1 2021, down to US$91b.
Guerzoni, says: “Analysts have long claimed that India represents the next big market for M&A; it appears their predictions are finally fulfilled as the market capitalizes on the slowdown seen in China.
“The centrality of technology in today’s M&A market cannot be understated. The accelerating demand for cloud-based services, IT security, and enterprise software, which was a prominent driver of M&A in 2021, is showing no sign of slowing. There are strong underlying reasons to expect the Life Sciences and Consumer sectors to see an acceleration of activity in the coming months. Consumer businesses are directly exposed to the key issues in the wider economy, particularly inflation, and Life Sciences companies still have significant available funds at hand to deploy. Coupled with the rapid decline in biotech valuations from their early 2021 peak these factors are likely to drive an uptick in dealmaking in the sector.”
Private capital set to drive activity, but beware of further shocks
Despite the widespread uncertainty, a fragile global economy and increased regulatory intervention, M&A is continuing apace, with a particularly strong flow of private capital driving activity. Even though capital market conditions have tightened sharply through the first half of 2022, private equity (PE) firms still have large amounts of cash that will need to be deployed in the latter half of the year.
Guerzoni says: “A trend that I expect to become a mainstay in the coming months is the use of private capital in both the equity and debt portions of transactions. Driven by both the vast amount of private capital available and rising interest rates, I expect this trend will continue making the role of private markets even more fundamental to the global economy. A barrier to this flow of deals will be if conditions deteriorate to the extent that debt financing dries up or becomes prohibitively expensive.
“While global M&A activity has proved remarkably resilient in the face of major geopolitical headwinds, it is uncertain whether it could sustain further shocks, whether that is further lockdowns, heightened geopolitical tensions or a recession.”
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