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Rising interest rates, geopolitical tensions, and recession fears have led to a downturn in Mergers and Acquisitions (M&A) activities in the first quarter of 2023, said a Boston Consulting Group report.
According to the report released on November 1, after the M&A frenzy in 2021 and early 2022, dealmaking was subdued during the latter half of last year and the first eight months of 2023.
By the end of August 2023, about 21,500 M&A deals had been announced, with a total value of $1.18 trillion. This represents a 14 per cent decrease in the number of deals and a staggering 41 per cent drop in their total value compared to the same period in 2022.
Covid-19 induced sharp decline in 2020, according to the report, followed an exceptionally busy period for dealmaking in 2021 and the first half of 2022. The Mergers and acquisitions volume reached approximately 41,000 deals, 28 per cent higher than in 2020 and 18 per cent higher than in the pre-pandemic year of 2019.
However, in 2022 deal volumes fell 9 per cent lower (37,000 deals) and it further declined by 38 per cent to $2.7 trillion compared to $4.3 trillion in 2021.
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“Over the past year, M&A dealmakers have confronted their most prolonged challenges since the 2008–2009 financial crisis,” said the 20th edition of BCG’s Global M&A Report.
Recovery underway in 2023
According to the report, M&A activity appears to be stabilising, with some regions and sectors rebounding faster than others.
“Savvy buyers and sellers will continue using M&A to generate value, even in unfavourable conditions. Beyond traditional motivations, sustainability and digital initiatives remain, pivotal drivers, for both acquisitions and divestitures,” said the BCG report.
“We’re relatively optimistic about the outlook for 2024, as deal activity shows promising signs of recovery. That said, challenges for dealmakers remain—in particular, a higher cost of capital, which will push companies to consider large or transformational deals with an even higher level of scrutiny," said Jens Kengelbach, BCG’s global head of M&A and a co-author of the report.
As per the report, dealmakers returning to the negotiating table continue to grapple with uncertainties like persistently above-average inflation, higher interest rates, heightened market volatility, fears of recession, and geopolitical tensions.
The report also noted that markets such as India, Taiwan, Italy, and Romania showed slightly more resilience while the US, Canada, France, and Germany took a harder hit..
“Although capital has become more expensive, abundant capital remains available from sovereign wealth funds, PE and VC investors, and some large companies — including technology titans and companies backed by sovereign wealth funds — that are flush with cash and boast strong balance sheets. These factors will bolster dealmaking in the near term,” said the Boston Consulting Group.
Further, the report noted that evolving regulations, including antitrust and foreign investment rules, as well as the pursuit of supply chain resilience, may influence M&A activity. Despite uncertainties, the fundamental drivers of M&A remain intact.
2023 Megadeals
According to the report, companies reported only 17 megadeals in the first eight months of 2023, compared with 27 during the same period in 2022. The year 2022 saw 33 megadeals, a decline from 50 in 2021.
As of September 2023, the year’s five largest deals were as follows:
- In March, Pfizer said it was buying Seagen, a biotech company focused on cancer and autoimmune disease treatments, for $43.8 billion in cash.
- In April, Glencore proposed a merger with Teck Resources worth $31.4 billion, even though it wasn't initially requested.
- In September, Cisco Systems said it was acquiring Splunk, a company that develops data insight and observability platforms, for $28.1 billion.
- In May, the largest SPAC deal of the year was announced, involving VinFast Auto, an electric vehicle manufacturer, and Black Spade Acquisition, a Hong Kong-based SPAC. The deal is worth $23 billion, and the buyer plans to list in the US.
- Also in May, ONEOK announced that it was merging with Magellan Midstream Partners, a US-based provider of pipeline services for refined petroleum products, in a deal valued at $18.6 billion.
