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2022 Economic Climate & the M&A Market

November 15, 2022
2022 Economic Climate & the M&A Market

Over the past two years, companies have weathered some of the most drastic changes in economic performance. Stocks have soared unpredictably high and have also dipped to record lows. Global health crises, oil prices, economic policies, and an ongoing war have all contributed to the ongoing uncertainty. Not surprisingly, unpredictability in the global economy has also led to fluctuations in the M&A market.

The Current State of Mergers and Acquisitions

Persient San Diego research found that mergers and acquisitions continue to withstand market pressures. The rate of mergers worldwide dropped by 27% compared to the previous year. However, compared to the last five-year cycle from 2015 to 2019, mergers climbed 35% and show no real signs of slowing down. In fact, experts expect the market to hold firm for the remainder of 2022.

The Role of Private Capital in M&A Activities

The pandemic contributed to significant uncertainty and a downturn in the private equity markets in 2020, but the market bounced back in 2021. Here are some vital statistics to note for this period:

  • Assets under management grew to $9.8 trillion, which represented a record high.
  • Dealmakers pumped $3.5 trillion into the global private equity market.
  • Fundraising reached $1.2 trillion, another record high.
  • The increase in fundraising represented a 20% year-over-year increase.

Growth has continued into 2022, with some industries showing a marked performance advantage over others. For example, real estate and infrastructure received strong support. Multifamily housing and industrial real estate seemed to deliver the most remarkable growth.

The Performance of American M&A Compared to Other Countries

America accounts for the vast majority of M&A capital and has maintained this position over the past few years. From 2020 to mid-2022, America contributed 64% of the money pumped into M&A transactions worldwide. For comparison, the United Kingdom takes second place and accounts for only 10% of capital in the M&A market.

The economic downturn has affected companies much differently across the board. Companies worldwide hiked prices in response to supply chain bottlenecks, labor shortages, and record inflation. However, the price hikes far exceeded expenses and led to record profits. Consider the following examples comparing profits in late 2021 and early 2022 to two years prior:

  • 809% for Steel Dynamics
  • 671% for Albertsons
  • 333% for Amazon
  • 144% for Chevron
  • 97% for PulteGroup
  • 83% for Keurig Dr. Pepper
  • 62% for Hershey

In comparison, US workers’ wages have only increased by 1.6% on average. Consequently, large corporations have billions of dollars at their disposal to invest in mergers and acquisitions. Corporations may choose to invest this money into other aspects of the business, such as stock buybacks and better employee benefits, but many have turned to the M&A market.

The Performance of American Private Equity Compared to Other Countries

America has outperformed most markets in 2022, but its private equity market has not fully bounced back. Despite increased activity worldwide, US PE deals declined by 28% in H1, reflecting a year-on-year fall. Even so, the total amount is an impressive $415 billion, which is the second-highest since 2006.

The good news is that markets seemed to have rebounded from the 2020 downturn. Private equity firms closed 20% fewer deals in H1 2022 at 1,727 than in 2021, but this shows an increase in the number of deals closed in 2020. Private companies in America also deserve recognition for maintaining high activity levels despite rising interest rates and growing uncertainty.

Technology has played a significant role in PE movements. In fact, technology, media and telecom represents one of the few sectors that saw an increase in activity compared to 2021. Transactions totaled 727 which represents a 17% year-on-year increase. The total amount of dollars in these transactions was almost identical to the previous year at $131 billion in H1 2022 vs. $133.2 billion in H1 2021.

Increased Scrutiny of M&A Markets and Private Equity Firms

The Biden Administration has expressed some concern about the activities of corporations and the record profits generated vs. the much slower growth in US wages. He has vowed to work with Congress to pass laws that will lead to a better distribution of wealth across the United States. The United States Securities and Exchange Commission has also increased its regulation of the private financial markets.

So far, these changes have not significantly affected the operations of firms that do business by the book. However, several companies have faced investigations and fines for failing to meet SEC guidelines.

The FTC has also taken several steps to block some M&A transactions, though this is not unusual. For example, it recently took steps to block Meta from buying Within Unlimited. The FTC has also set its sights on Amazon’s bid to acquire iRobot for $1.7 billion.

It’s important to note that these government interventions are not unique to the United States. In fact, many would argue Europe is even stricter regarding protecting competition in the market. Earlier this year, the EU blocked Hyundai and Daewoo from merging.

In some cases, the concern is national defense. For example, the UK recently blocked a Chinese company from purchasing a Bristol-based electronic design business. The government cited concerns that the Chinese could exploit the company’s unique competencies to build defense technology. The UK also cited national security concerns when it banned Huawei’s 5G infrastructure.

Effects of Political Policies

The Trump Administration levied strong sanctions against China to revive the local manufacturing market. Since then, the Biden Administration has maintained similar sanctions against China. These have led to reduced M&A transaction activities involving Chinese investments in US markets. Before former President Trump took office in 2016, Chinese investments stood at $27 billion. They have since fallen to just $1.9 billion.

Meanwhile, North American expansion into Europe has increased. Reports show that in early 2016, American companies had invested $60 billion in the European markets. That amount has since grown to $149 billion. Two main factors make this interesting:

  1. Tech companies account for a big portion of M&A growth. The technology sector accounts for almost one-third of current M&A transactions.
  2. The tech sector expressed concerns about the GDPR. Tech companies predicted the GDPR would limit expansion into Europe, but this does not seem to be the case.

The Role of Tech Companies in the Growth of the M&A Market

While tech companies represent a small portion of overall M&A growth, they have made a significant impact. Tech giants like Google and Meta are making strategic acquisitions to strengthen their market position in data-intensive sectors, such as healthcare and finance.

However, the real competition came from an unlikely source. America and China have remained two of the top players in the M&A market, but India also saw increased activity. The country saw a 215% increase compared to the previous five-year cycle. This amounted to $128 billion in domestic, inbound, and outbound activity. Tech deals made up the vast majority of M&A transactions for India.

Best Practice for Navigating M&A in Global Markets

Companies must seek trusted partners to help them navigate the increasingly complex web of mergers and acquisitions. Whether you want to buy or sell a business, our Persient San Diego team can craft a strategic approach for your M&A transaction. Schedule an M&A consultation to get started.

Investment banking services and securities offered through Independent Investment Bankers Corp., a registered broker-dealer, Member FINRA / SIPC. Persient LLC and Independent Investment Bankers Corp. are not affiliated entities. FINRA Broker Check.

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