Dealmaking slips by almost a third in 2022 marked by volatility, inflation

Stubbornly high inflation, soaring borrowing costs and geopolitical uncertainty hindered dealmaking in 2022, sending global mergers and acquisitions activity down by almost a third compared with last year’s record haul.

Companies announced $3.5 trillion of deals in 2022, according to data compiled by Bloomberg, striking transactions to bulk up existing businesses, push into new sectors or reorganize operations against a volatile backdrop of slumping equity markets and forceful antitrust actions. Megadeals announced early in the year were soon replaced by jitters about getting M&A over the finish line, with monthly deal activity plummeting by almost half from May to June. The volumes have yet to recover.

“It’s really the tale of two years,” said Melissa Sawyer, global head of Sullivan & Cromwell’s M&A group. “When we started 2022, people were churning out deals left and right and SPACs were still a thing. Then the landscape for M&A changed dramatically.”

The year started off on a high note when Microsoft agreed in January to buy video game publisher Activision Blizzard for $69 billion, in the biggest deal since 2019. For a moment, 2021’s gangbuster performance—which saw a record $5 trillion of deals announced—looked set to continue.

Sentiment quickly started to fizzle. In February, Russia invaded Ukraine, and the next month the U.S. Federal Reserve embarked on its most aggressive interest rate hiking spree in decades, bringing the overnight rate to the highest level since 2007.

“There was so much stuff going on: inflation, the central bank’s response to that with the increase in interest rates, geopolitical stuff, supply chain issues and unbelievable stock market volatility,” said Damien Zoubek, co-head of U.S. M&A at Freshfields Bruckhaus Deringer. “You throw all that stuff into the Cuisinart and you get really choppy M&A markets.”

Elon Musk’s pursuit of Twitter Inc. also brought a dose of uncertainty to the dealmaking community, tying up advisers and lenders for months as the billionaire flip-flopped on plans to take the social media network private. His $44 billion buyout, which eventually closed in October, left a Morgan Stanley-led cohort saddled with about $13 billion of debt financing.

As ever, volatility was the true menace to dealmaking, and to the fragile market for initial public offerings. The Cboe Volatility Index, known as the VIX, has for the most part stayed well above its long-term average this year, peaking at 36.45 in March.

When the IPO window slammed shut, it removed an exit option for investors and a funding avenue for cash-burning firms that seemed unstoppable a year ago. Only $24 billion has been raised in U.S. IPOs this year, the slowest since 2009, according to data compiled by Bloomberg. The backlog could lead to more acquisitions of startups in 2023.

“A lot of management teams and boards now recognize that the multiple reset isn’t temporary,” said Edward Lee, a partner at law firm Kirkland & Ellis. “When a buyer approaches with a meaningful premium, it’s increasingly hard to ignore that. More and more you’re going to have targets who take those offers very seriously.”

Dealmaking among private equity firms followed a similar trajectory to public company M&A. The year started with a jumbo deal: the $16.5 billion buyout of Citrix Systems by Vista Equity Partners and Elliott Investment Management. After that, reality caught up, as inflation started weighing on firms’ operating costs and margins, monetary tightening around the globe made buyouts more expensive and banks got stuck with hung debt. Buyout volumes fell in every quarter of the year, according to data provider Preqin.

“I thought it would be tough but didn’t think it was going to be that challenging,” said Kristoffer Melinder, managing partner at Nordic Capital. “The problem is price and for that to settle you need lower rates—let’s call it what it is.”

While challenging financing markets meant several private equity transactions fell apart or got postponed, they also forced sponsors to get more creative. Some opted to use more equity to finance deals, while others got rid of a debt component entirely. And even in the absence of easy financing, buyout firms are still sitting on record amounts of dry powder. Plummeting public markets could provide opportunities once boards get comfortable with their new valuations. In the meantime, companies are selling assets.

“Carveouts happen when large corporates re-assess what is non-core,” said Marco De Benedetti, co-head of Europe private equity for Carlyle Group Inc. “That often happens during times of volatility, which we are seeing now.”

There could be more of that in the consumer products industry, added Jim Langston, co-leader of U.S. M&A at Cleary Gottlieb Steen & Hamilton.

“We think there are a lot of opportunities there to use spinoffs to separate high-growth from low-growth assets and achieve multiple re-ratings,” Langston said. That’s particularly true “in an environment where it’s tougher than normal to do divestitures because of regulatory pressures, equity market volatility and financing disruption,” he said.

The final months of the year did bring some highs for financial services dealmakers, with two large transactions in the sector. Insurer Aegon combined its Dutch business with local rival ASR Nederland in one multibillion-dollar deal, and HSBC Holdings agreed to sell its Canadian business to Royal Bank of Canada for about $10 billion, continuing a trend of European lenders exiting North America.

“The most pronounced M&A trend in banking has been the continued streamlining by global banking groups,” said Andreas Lindh, co-head of JPMorgan Chase & Co.’s financial institutions group in Europe, the Middle East and Africa.

Whether 2023 can surpass this year will hinge on when markets stabilize enough for debt financing to become more readily available and postponed situations to relaunch. A lot will also lie in the hands of antitrust enforcers: the U.S. Federal Trade Commission is seeking to block Microsoft’s acquisition of Activision Blizzard, with the agency’s trial not set to start until August.

Still, advisers are hoping that activity will start to pick back up in 2023—especially after the first half—and that Amgen Inc.’s $27.8 billion deal to buy Horizon Therapeutics Plc, announced last week, could be a harbinger of big deals to come.

“We’ve now had a couple quarters to digest what’s happened,” said Brian Haufrect, co-head of Americas M&A at Goldman Sachs. “It feels like we’re finding more solid ground. The financing markets have been functioning a bit better. All the ingredients for M&A are still there.”