Global mergers and acquisitions (M&A) performance bounced back in the third quarter of this year, according to research on completed deals from the Quarterly Deal Performance Monitor (QDPM). Based on share price performance, buyers outclassed the wider market by +3.9 percentage points for deals valued over $100 million between July and September 2022.1 WTW (NASDAQ: WTW) is a leading global advisory, broking and solutions company.
Run in partnership with the M&A Research Centre at Bayes Business School, the data also reveal the extent to which risk sentiment has cooled. Global deal activity is significantly down, with 210 deals completed in the third quarter of 2022 compared with 264 in the same quarter of 2021; however, this indicates a return to healthy pre-pandemic levels after the record-setting pace of 2021 driven by exceptional conditions.
For the first time since the second quarter of 2019, no mega deals (valued over $10 billion) were closed in the past quarter. Large deals (valued over $1 billion) were also significantly down compared with the same period in 2021 (49 versus 67). This decline in larger deal activity suggests acquirers are growing more cautious by avoiding the risks that come with more complex deals as well as spending more time on their due diligence processes in response to increasing regulatory scrutiny in several key markets.
Despite the perfect storm of challenges facing the market — rising interest rates, higher inflation, geopolitical tensions and a looming recession — that has clearly weighed on deal-maker sentiment, M&A is showing significant resilience.
“Markets have seen a ‘flight to quality’ as investors avoid high-yield and exotic assets, instead focusing on more stable and defensive businesses of sufficient quality to mitigate the short-term market concerns,” said Duncan Smithson, senior director, Mergers and Acquisitions, WTW.
“M&A activity is likely to continue with a more cautious tone as we head toward the end of the year. The flight to quality reinforces the need for companies to set their sights on assets with a clear, well-articulated strategic rationale. Assets perceived as being ‘just okay’ are unlikely to transact in this lower-risk environment,” said Smithson.
Overall, only European acquirers underperformed their regional index. Asia Pacific acquirers outperformed by +14.4 percentage points, with 49 deals closed in the third quarter of 2022. North American acquirers also outperformed their index by +4.5 percentage points, with 98 deals closed between July and September. Dealmakers from Europe, who have been most disrupted by geopolitical and global financial uncertainty, underperformed their index by –6.7 percentage points, with 51 deals completed.
Despite major geopolitical and financial headwinds, and the potential for further shocks still to come, M&A is continuing apace.”Duncan Smithson | Senior Director, M&A, WTW
“For the first time in a generation, we are faced with a volatile cocktail of surging inflation and rising interest rates, combined with increased regulatory intervention, applying further pressure to an already fragile global economy. Despite these major geopolitical and financial headwinds, and the potential for further shocks still to come, M&A is continuing apace.
Even though financial conditions have tightened sharply through the first nine months of 2022, plenty of dry powder is still available, with some investors seeing current conditions as a buying opportunity and private equity firms needing to deploy large amounts of cash by year-end. We expect competition for much-needed technology, ESG [environmental, social and governance] priorities, supply chain resilience and recession-proof industry deals to drive dealmaking into 2023 as companies navigate current market uncertanties and plan for long-term growth,” concluded Smithson.
1 The M&A research tracks the number of completed deals over $100m and the share price performance of the acquiring company against the MSCI World Index, which is used as default, unless stated otherwise.