M&A plunges 37% during first half of 2023

By Jim Tyson for CFODive.com

• The volume of deals worldwide valued at more than $100 million plunged 37% to just 280 during the first half of this year, undercut by rising interest rates and a gloomier outlook for the global economy, Willis Towers Watson said Thursday.

• “A perfect storm of higher inflation, interest rates, capital costs and greater regulatory scrutiny, combined with major geopolitical headwinds and a banking crisis, have triggered a steeper drop-off in M&A activity than anticipated by the market,” David Dean, a North America managing director at WTW, said in a statement.

• The volume of deals in North America from April through June fell for the sixth straight quarter to 61 compared with 173 during the third quarter of 2021, WTW said in a joint report with the Bayes Business School. North American deal-makers did not prosper from M&A, with company share prices lagging regional equity markets by 5.9 percentage points during the first half of the year.

The slump in M&A is one of many challenges bedeviling CFOs this year. Stock price volatility, the most aggressive monetary policy tightening in four decades and a persistent barrage of recession warnings have disrupted CFO financing strategies in 2023, including plans for deal-making.

During the first half of 2023 the volume and value of global deals across a full range of sizes slumped 14% and 40%, respectively, compared with the same period last year, according to PwC.

The downturn has created a “buyers market,” PwC Global Deals Industries Leader Brian Levy said in a statement, noting clout “for cash-rich corporate acquirers.”

“It’s essential for sellers to work harder to prepare for upcoming sales — or risk losing out,” Levy said.

Deal-making has slumped worldwide partly because of the murky outlook for the global economy, WTW said. World output growth will likely fall to 2.8% this year from 3.4% in 2022, the International Monetary Fund forecast in April.

“Buyers have had to shift gears to adapt to a more cautious M&A environment,” Dean said.

“With these disruptive trends expected to continue into the second half of 2023, potential buyers will be kicking the tires a bit harder as they seek deals to address strategic priorities, expand into new markets and fill capability gaps,” he said.

When inflation slows and credit markets ease up, pent-up demand, digital transformation and a focus on environmental, social and governance best practices will probably fuel a resurgence in deal-making, Dean said.

“After a lull, deal volumes pick up very quickly and we would expect something similar,” he said in an email response to questions.

Antitrust enforcement and regulatory headwinds will likely discourage large M&A in coming months, pushing deal-making into middle- and small-size transactions, he said.

“While cash-rich corporates remain well positioned to make larger moves, we see mid-market transactions dominating the market in coming months as CEOs use a program of both strategic acquisitions and select divestitures to transform their portfolios,” according to PwC.

Companies through acquisitions will acquire expertise in artificial intelligence and other high-skill, high-demand technologies, PwC predicted, noting that AI talent is “one of the scarcest resources to find.”

The energy transition is also prompting deals, with automotive and other manufacturers buying mining companies to ensure the supply of minerals essential for producing batteries and storing energy, PwC said.

During the current buyer’s market, “sellers cannot prepare enough,” PwC said. “Today, to complete a deal and avoid price reductions, sellers should anticipate a greater level of scrutiny from buyers and their funding sources, and they will need to be ‘deal ready.’”

The current downturn is, to a degree, a correction after robust M&A in 2021, Dean said in an email response to questions.

“What is unusual about the current slump is that it represents six straight quarters where deal volumes have declined,” he said. “However, this can be explained by the huge number of transactions that occurred in 2021 following” the pandemic-triggered tailspin in deal-making in 2020.