Increasing headwinds have resulted in a challenging M&A market in 2022. Rapid inflation, lower stock prices, higher interest rates, rising energy prices and geopolitical uncertainty have all contributed to greatly reduced M&A volume and valuations so far in 2022. Further, only one SPAC deal has closed so far in 2022 (compared to over 40 in 2021).

Activity is certainly slowing down. Not only is debt more expensive, but banks are now asking more probing questions in their due diligence process for M&A debt financing, particularly in the area of a target company's susceptibility to inflation and rising interest rates. This is increasing the time required to get through the approval process and making it harder to close deals. And exit opportunities are also down, given that the market for initial public offerings in 2022 has all but closed.

What does this mean for the balance of the year? Our crystal ball is no clearer than most others, but there are some indications that, at least for the private equity markets, there are some decent opportunities.

  • PE Dry Powder Remains Strong. Despite the uncertainty, private capital reserves are strong, and market participants continue to believe that significant opportunities exist. A recent Pillsbury inquiry of 150 U.S.-based corporate and PE executives indicated that 71% of respondents still expect to execute four or more deals in 2022. We believe many buyers are proceeding with deals even before the market finds its bottom.
  • Cost Synergies and Operational Efficiencies. One of the most compelling factors in the market is the ongoing and increasing need to take advantage of scalability, technological advancements and digital transformation. According to Philip J. Isom, Global Head of M&A at KMMG, "to remain competitive, companies are compelled to buy new capabilities. Last year, the number of deals in which a non-tech firm bought a tech firm jumped by 68 percent." This also plays into strategic acquisitions, which historically command higher deal prices than financially driven deals.
  • U.S. Infrastructure and Climate Change Legislation. Though, as of the date of this piece, President Biden's ambitious plan for infrastructure investment has been substantially watered down, many believe that the appropriations for climate change will spur investment and provide additional opportunities for deals.
  • Regulatory Scrutiny may Temper Megadeals. Megadeals within tech, pharma and banking are likely to continue to face more regulatory scrutiny than in other sectors, in both the U.S and the U.K. In February 2022, Nvidia's planned $40 billion acquisition of Arm (the British semiconductor company owned by Softbank) was terminated as a result of DOJ and U.K. regulators launching probes which effectively killed the deal. In our view, the prospect of more regulatory oversight in these areas will continue.
  • ESG Deals. ESG-related deals are increasing in number. As climate change becomes more front and center in both the geopolitical theater and the business market, many companies are trying to raise their environmental and sustainability credentials. Note that Japan's largest investment bank, Nomura, recently acquired an ESG-focused M&A advisory firm called Greentech Capital Advisors, in the belief that companies across multiple industries will increasingly turn to dealmaking as part of their efforts to boost their environmental and sustainability profile.

Conclusion

There are headwinds to be sure, including geopolitical instability, but there are also several pockets of opportunities and activity. As the public markets have dried up as a means to fund M&A, the private capital markets, with their enormous cash reserves, still have ample opportunities to provide investors attractive returns.

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