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Q4 2022 – Global M&A set for positive start to year ahead with strong finish in 2022

Quarterly Deal Performance Monitor – Q4 2022

January 16, 2023

Global dealmakers achieved a second consecutive quarter of market outperformance in the last three months of 2022.
Mergers and Acquisitions
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Global dealmakers achieved a second consecutive quarter of market outperformance in the last three months of 2022, according to research on completed deals from WTW’s Quarterly Deal Performance Monitor (QDPM). Based on share price performance, companies making M&A deals outclassed the wider market1 by +5.2 percentage points for acquisitions valued over $100 million between October and December 2022. This follows a positive performance of +3.9 percentage points in the previous quarter.

Run in partnership with the M&A Research Centre at Bayes Business School, the full-year figures for 2022 still reveal a slight underperformance by buyers of –0.8 percentage points compared with non-acquirers, despite the upturn in acquirer performance in the second half of the year. This contrasts with a positive full-year performance of +1.4 percentage points in 2021. Deal volume in 2022 was also significantly down by 19%, with 853 deals completed globally, compared with 1,047 deals in 2021, driven by a marked slowdown in M&A activity in North America.

“While geopolitical tensions, inflation and rising interest rates had an inevitable impact last year on deal activity and performance, the extraordinary pace set in 2021 was also unsustainable,” said Duncan Smithson, senior director, M&A Consulting, WTW. “Rather than being interpreted as a downward trend, current M&A volumes reflect a return to healthy pre-pandemic levels.

“Macroeconomic uncertainty will persist in 2023, yet deals will still get done. Despite the bar being raised on difficulty, the positive M&A performance sustained over the past two quarters clearly indicates the ability of strategic buyers to succeed in challenging environments. By looking at target companies with an even finer lens, investing more time and resources to ensure quality due diligence, dealmakers will be well placed to generate value and drive longer-term growth from deals.”

*The figures in the table show the annual median-adjusted performance of all acquirers. Any individual acquirer may have performed better than the median – in some cases, significantly better.

North America led the slowdown in activity, with acquirers closing 402 deals in 2022, 35% fewer compared with the 614 deals completed in 2021. In contrast, deal volumes have been more stable in Europe and Asia Pacific, with both regions seeing a marginal increase in M&A activity during the past 12 months. European acquirers completed 203 deals in 2022 compared with 199 in 2021, while 200 deals were completed by Asia Pacific dealmakers in 2022 compared with 196 the previous year.

While Asia Pacific buyers outperformed their regional index by +10.1 percentage points for 2022, the full-year figures show an annual underperformance across other regions, with North American and European buyers underperforming their industry peers by –1.9 percentage points and –5.7 percentage points, respectively.

In contrast to the full-year results, the final three months of 2022 showed a stronger global performance by dealmakers not only in Asia Pacific (+10.5 percentage points) but also in North America where acquirers also strongly outperformed their regional index (+9.4 percentage points). Only dealmakers from Europe continued to underperform their index, doing so by –2.6 percentage points during the final quarter of 2022.

5 M&A trends for 2023

Duncan Smithson shares his top trends for the year ahead:

  1. 01

    Return of the “small purchase effect”

    Buyers will increasingly focus on smaller deals as recessionary fears trigger a “small purchase effect”’: when economic downturns lead to a rise in spending on smaller, more affordable — rather than big ticket, more expensive — goods. For the first time in over three years, no mega deals (valued over $10 billion) were closed during the third quarter of 2022, and large deals (valued over $1 billion) were significantly down compared with the same period in 2021 (49 versus 67).

  2. 02

    Opportunities in distressed M&A

    The difficult operating environment will drive an increase in companies jettisoning non-core assets in the pursuit of long-term value creation. Some deals will be strategic (e.g., energy firms continuing to divest carbon-intensive assets), while the ongoing economic uncertainty will force other companies to sell assets (e.g., the retail and leisure sectors often have a higher operating leverage). This can create opportunities for buyers to expand product lines, services or supply chains at a reduced rate.

  3. 03

    Technology M&A: From defense to offense

    The need for speed in digital transformation across industries, accelerated by volatility, will keep dealmaking front and center, with a wave of acquisitions in the artificial intelligence and machine learning markets expected in 2023. Whether adopting new technologies and talent or reaching new markets, M&A continues to be the fastest way for businesses to transform to remain relevant and resilient in today’s fast-changing world.

  4. 04

    Geopolitical impact

    Hit by multiple supply chain disruptions during the pandemic that are set to stay in 2023, companies will look to M&A transactions to boost their operational resilience. Vulnerabilities that continue to deliver distressed deal flow in the worst-affected sectors will also be a catalyst for businesses to reinvent their own supply chain networks. By onshoring or nearshoring suppliers closer to the point of production, businesses will aim to achieve greater security and resilience.

    Cross-border M&A activity decreased in 2022, reflecting economic and geopolitical upheaval on the world stage. The pursuit of stability and predictability will likely lead to more deals among trusted partners, signaling a shift to more selective “friend-shoring” transactions in 2023.

  5. 05

    Spotlight on ESG

    Environmental, social and governance (ESG) issues in dealmaking will remain in the spotlight in 2023, especially as acquirer due diligence will be more important than ever. With increasing numbers of investors seeing ESG as a fundamental driver of financial success, businesses will face mounting scrutiny and pressure for transparency on climate risk, social justice, sustainability and corporate governance. “Green” due diligence is, without a doubt, on the up.

Footnote

1 The M&A research tracks the number of completed deals over $100 million and the share price performance of the acquiring company against the MSCI World Index, which is used as default, unless stated otherwise.

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