In spite of major geopolitical and financial headwinds in recent times, global mergers and acquisitions (M&A) activity in 1H2022 has been resilient, according to Ernst & Young’s (EY) analysis of M&A data.
During the period, there were a total of 2,274 deals with a total value of US$2.02 trillion (2.7 trillion), which represents an 18% y-o-y increase in volume and a 27% drop y-o-y by value. M&A activity is also up compared to the average of the last M&A cycle from 2015 to 2019, with value growth of 35% and volume growth of 13%.
According to analysis by EY, the nature of cross-border deals is changing to reflect geopolitical tensions on the world stage. While cross-border transactions levels in 1H2022 have decreased to 24% in 2022 as compared to an average of 30% from 2015 to 2019, the share of cross-border deals among closely affiliated countries has increased to 51% in 2022 compared to an average of 42% from 2015-2019.
“Coming off the Spac-induced highs of the first half of 2021, M$A activity was always going to go through a correction. But what we see is that unlike when Covid-19 hit and deal activity came to a standstill, CEOs are still trying to look through the fog and are pursuing transactions that will help position their organisations for future growth,” says Andrea Guerzoni, EY Global Vice Chair, strategy and transactions.
He adds: “On the global stage, while there is still a strong appetite for cross-border deals, CEOs are more selective in who they do deals with, preferring to ‘friend-shore’ their operations and pursue transactions within friendly pockets rather than applying a truly global approach.”
Further to its statement, EY also finds that investment from China into the US has fallen from US$27 billion at the highpoint in 1H2016 to US$1.9 billion, while North American investment into Europe has increased from US$60 billion to US$149 billion over the same period.
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India, on the other hand, has had an extremely active start to the year with the combined value of its outbound, inbound and domestic deals jumping to US$128 billion and increase of 215% compared to the average of the last deal cycle from 2015 to 2019.
According to EY’s analysis, as well as a burst of domestic M&A activity of US$107 billion as compared to an average of US$21.5 billion from 2015 to 2019, 1H2022 also saw an increase of Indian-owned companies buying foreign-owned assets worth US$6.2 billion compared to US$2.3 billion over the average of the last deal cycle.
“Analysts have long claimed that India represents the next big market for M&A; it appears their predictions are finally fulfilled as the market capitalizes on the slowdown seen in China,” Guerzoni notes.
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On the whole, however, there has been a slowdown in M&A activity in 1H2022 across Asia with 534 deals worth around US$84 billion, compared to 758 deals worth US$97 billion in 1H2021.
“The slowdown in M&A activity in Southeast Asia is likely due to the impact from the rising interest rates, global inflation and supply chain disruptions, geopolitical headwinds, surging oil prices and the shortage of skills and manpower in certain sectors,” explains Kah-Loon Mah, CEO at EY Corporate Finance. “That said, I do not think that M&A activities are being curtailed or are being put on hold at present. Instead, companies are becoming more discerning; in fact, many are still exploring investment opportunities, but with greater care.”
With regards to sector performance, the technology sector drove global M&A in 1H2022, accounting for nearly a third of global M&A activity. Deals focused on technology targets are now at double the level of the previous cycle up 95% against the 2015-2019 average of US$322 billion.
“The centrality of technology in today’s M&A market cannot be understated,” Guerzoni says. “The accelerating demand for cloud-based services, IT security and enterprise software, which was a prominent driver of M&A in 2021, is showing no sign of slowing.”
In Asia, the technology sector is also facing strong interest from investors, capturing 31% of the 1H2022 deal volume in the region.
Private capital set to drive activity, but caution remains on further shocks
Despite the widespread uncertainty, a fragile global economy and increased regulatory intervention, M&A is continuing apace, with a particularly strong flow of private capital driving activity. Even though capital market conditions have tightened sharply through the first half of 2022, private equity (PE) firms still have large amounts of cash that will need to be deployed in the latter half of the year.
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“While corporates have become more cautious and the IPO market is slow currently, we still see private capital having a lot of liquidity to deploy,” says Luke Pais, EY Asia-Pacific private equity leader. “As such, I believe that private capital will be taking a larger share of the transactions market in the coming quarters.”
“The private capital offering in the region is also becoming more sophisticated, with capital pools focusing on the different needs of businesses, such as sector-specific growth and buyout solutions, credit solutions, as well as longer-term capital solutions,” Pais adds. “Going forward, we can also expect to see a lot more secondary deals and continuation funds as private capital takes their portfolio through multiple stages of growth.”
Guerzoni also says that a trend he expects to become a mainstay in the coming months is the use of private capital in both the equity and debt portions of transactions. “Driven by both the vast amount of private capital available and rising interest rates, I expect this trend will continue making the role of private markets even more fundamental to the global economy,” Guerzoni notes.
“While global M&A activity has proved remarkably resilient in the face of major geopolitical headwinds, it is uncertain whether it could sustain further shocks, whether that is further lockdowns, heightened geopolitical tensions or a recession,” he adds.
Photo: Bloomberg
