Corporate M&A 2023

Introduction

Following 2021’s record year in M&A, deal-makers entered 2022 with expectations for another strong year with high activity levels. While 2021’s activity carried over into the start of 2022, deal-making activity quickly experienced a significant slowdown; that slowdown was particularly significant during the second half of the year. Russia’s invasion of Ukraine in February 2022 sent a shockwave through global markets, setting off economic sanctions against Russia’s economy and assets. Global M&A took a hard hit, with European deal-making facing the biggest impact of these geopolitical developments. US-China relations also deteriorated, reducing M&A transactions between North America and China to their lowest level of activity since 2013. M&A markets faced other strong headwinds, including inflation, rising interest rates, a general downturn in the global economy, a rapid decline in SPAC activity from 2021 and the evolving stricter antitrust and foreign investment review regimes.

While many of the same headwinds face M&A markets in 2023, particularly an increasingly complicated regulatory landscape, the start of the new year has shown some signs of resilience. US deal volume increased by 5.8% in January 2023, with 1,278 deals announced compared to 1,209 in December 2022. The S&P 500 and Dow Jones Industrial Average gained 6.2% and 2.8% in January, respectively. Global inflation eased for the seventh straight month in January 2023 following peak inflation in June of last year. Other conditions are present that support M&A activity, including record levels of private equity dry powder and a strong US dollar that is expected to spur cross-border transactions. While other regulatory and macroeconomic headwinds remain, M&A markets have the potential to rebound in 2023, particularly during the second half of the year. 

M&A Activity Trends in 2022

After a record-breaking year in 2021, global M&A activity slowed to historical levels after facing strong headwinds from a variety of geopolitical and macroeconomic factors. Approximately USD3.7 trillion in deals were announced in 2022, representing a 37% decrease from 2021’s record USD5.9 trillion in deals. While deal activity experienced a significant drop-off from 2021, global deal volume moved in line with the five-year average (excluding 2021) of USD3.8 trillion.

Robust deal-making carried over from 2021 to drive approximately USD2.2 trillion worth of deals through the first half of the year. However, M&A activity took a hard hit during the third and fourth quarter of 2022, with deals taking longer to come together and a higher percentage of busted deals. The third quarter was one of the slowest since the onset of the pandemic in 2020, affecting almost all segments in global markets. The aggregate deal value for the third quarter was USD443 billion, a 50% decline compared to the second quarter of 2022.

Large and strategic deals also declined during 2022. Only 39 deals were announced with a transaction value over USD10 billion, compared to 59 such deals during 2021. The strategic market declined by 32% from its all-time high in 2021. The top five industries remained largely unchanged for 2022, with the technology sector leading the way with 2,589 transactions worth USD612.6 billion, representing an 11% and 40% year-on-year decline, respectively. The sectors that saw the largest uptick in M&A volume year-on-year are oil & gas (up 19%), energy (up 21%) and mining (up 15%).

Aggregate deal value in the USA, Europe and Asia

Facing strong headwinds during the second half of the year, the aggregate value of US deals fell by approximately 38% from 2021 levels. US M&A activity continued to represent a substantial percentage of global deal volume, with aggregate transaction volume totalling roughly USD1.6 trillion (approximately 43% of global M&A volume) for the year, as compared to approximately USD2.5 trillion (roughly 43% of global M&A volume) in 2021. A total of 8,468 M&A deals were announced in the United States in 2022, representing only a 10% decline in year-over-year deal volume.

Outside the US, European deal-making took a hard hit in light of geopolitical developments, with USD150 billion in proposed European M&A transactions withdrawn in the first month alone following Russian’s invasion of Ukraine. European deals totalled USD1.1 trillion, down 26% from 2021. Asia Pacific deals totalled USD0.9 trillion, down approximately 31% from 2021, due in part to the significant decline in Chinese M&A activity.

SPAC trends

Continuing the decline in SPAC transactions at the end of 2021, 2022 again saw SPAC activity slow dramatically. On 30 March 2022, the US Securities and Exchange Commission (SEC) released a series of proposed rules that would close the regulatory gap between SPACs and traditional IPOs. Most notably, the SEC signalled that investment banks may undertake underwriter status for de-SPAC transactions, and indicated that a safe harbour for forward-looking statements under the Private Securities Litigation Reform Act of 1995 would not apply to de-SPACS. The proposed rules would also require extensive new disclosures by SPACs regarding conflicts of interest, a fairness determination for any de-SPAC transaction and an assessment of potential shareholder dilution.

A number of lawsuits have independently attacked conflicts of interest inherent in the structure of SPACs. In In re MultiPlan Corp. Stockholders Litigation, the Delaware Chancery Court applied the entire fairness standard to a de-SPAC transaction, refusing to dismiss claims of breach of fiduciary duty against the SPAC directors and other parties associated with the de-SPAC. The Delaware Court of Chancery’s decision in Delman v GigAcquisitions3 affirmed the Multiplan decision and indicated that even robust disclosures will not entitle SPACs to the business judgment standard of review.

As a result of these factors as well as historically poor returns and rising interest rates, both SPAC IPOs and de-SPAC M&A fell sharply: just 85 SPAC IPOs priced in 2022 compared to 613 in 2021, and 196 de-SPAC deals were announced over the course of 2022 compared to 289 in 2021. Additionally, 143 SPAC IPOs were withdrawn, the highest number on record, and another 68 de-SPAC transactions were terminated compared to 18 deals terminated in 2021.

Geopolitical tensions and cross-border M&A

Due in part to rising geopolitical tensions on the global stage, 2022 saw a decline in M&A activity. In February 2022, Russia invaded Ukraine, provoking the largest European war and political crisis since the Second World War. The USA, the European Union, Japan and other countries responded with sanctions targeting critical areas of the Russian economy. The war and resulting sanctions have had a worldwide economic impact, including contributing to global inflation and causing significant volatility in the stock markets. While European deal-making has experienced the most significant impact of these geopolitical developments, the interconnectedness of the global economy has led to a more challenging M&A environment in all markets.

Relations between the United States and China also deteriorated in 2022. Several factors contributed to the current state of affairs:

• China and the United States have taken increasingly aggressive positions regarding the status of Taiwan;
• China’s “zero-COVID” policies have greatly decreased the flow of people into and out of the country, and factory closures resulting from these policies have made China a less reliable manufacturing partner for US companies;
• the United States has taken steps to limit Chinese imports of semiconductors while simultaneously encouraging the development of US domestic production in this industry; and
• the United States shot down a suspected Chinese surveillance balloon off the coast of South Carolina in February 2023.

M&A activity involving China has fallen by 35% since 2021, reaching the lowest level since 2013.

Factors in Favour of M&A in 2023

Although some of 2021’s deal activity spilled over into 2022, M&A activity slowed significantly during the second half of 2022 due in part to a combination of macroeconomic factors, including stock market volatility, high interest rates and contractionary monetary policy, as well as geopolitical uncertainty and increased regulatory scrutiny on M&A transactions. Many of these headwinds continue into the new year, but opinion is divided on the outlook for 2023: some expect M&A activity to rebound in line with five-year averages while others anticipate a further drop-off in M&A activity. While large M&A deals are off to a slow start in 2023, with no deals announced in January with a transaction value of more than USD10 billion, total US M&A deal activity in January increased by 5.8%. If the start of the new year is any indication of what is to come, cautious optimism is building for M&A markets and deal-marking opportunities in 2023. 

A good buying opportunity

M&A activity tends to slow during times of uncertainty or market volatility, but such periods can also present good opportunities for purchasers looking to acquire businesses or assets at depressed prices. Valuations of historically highly valued companies and assets, particularly in the tech sector, have become more attractive amid instability in the equity markets. Valuations for private companies are taking longer to adjust, but deal-making is expected to pick up as sentiment evolves from a seller’s to a buyer’s market. Due to a reset in valuations, lessened competition for deals and new assets coming to market, including from distressed situations, companies with cash on hand may use acquisitions as part of their strategy for growth in 2023.

Dry powder

Private equity firms have record amounts of dry powder, or committed but unallocated capital, to use for investments during 2023. Private equity firms currently have significant available cash reserves, totalling over USD1.96 trillion dollars at the start of 2023, representing a 21% year-over-year increase from the USD1.62 trillion in reserves reported in December 2021. Nearly one quarter of the industry’s estimated cash reserves are held by just 25 firms, of which 18 are based in the United States and seven in Europe. Potential targets may be able to strike favourable deals as private equity firms look to deploy capital throughout 2023.

De-SPAC activity

In addition to record levels of private equity dry powder, a significant number of SPACs are still looking to complete business combination transactions. At the end of 2022, approximately 350 SPACs, with over USD96 billion in proceeds, faced a 2023 deadline to acquire a target. Despite the continued scrutiny on SPACs, with a large number under pressure to complete a business combination transaction, it is likely that at least some residual de-SPAC M&A activity will result in transactions in 2023.

Corporate carve-out transactions

A trend from 2022 that will likely remain prevalent in 2023 is the widespread use of corporate carve-out transactions and spin-offs. Down cycles and general market uncertainty often force companies to re-evaluate their portfolios under new scenarios leading to an increase in divestiture transactions. Corporate carve-outs, particularly in the form of tax-free spin-offs, maintained a steady pace last year despite the overall decline in M&A deal volume. Over thirty USD1 billion-plus divestitures and nearly forty spin-offs were announced during 2022 across a wide range of industries. Activists also commonly pushed for break-ups or divestitures in portfolio-based campaigns throughout the year.

Portfolio reshaping is expected to remain a driving force for deal-making in 2023, as corporates look for opportunities to separate high-growth from low-growth assets. Leveraged spin-offs can also provide an attractive opportunity for a parent company to de-lever or put cash on the balance sheet. Other creative deal structures, including joint ventures and partnerships, will also provide opportunities to diversify balance sheets and unlock synergies.

Cross-border activity

The pandemic, Russia’s invasion of Ukraine, trade tensions between the United States and China, and other economic conditions significantly dampened cross-border M&A activity in 2022. As these headwinds diminish, cross-border activity should increase as companies seek to fortify their global supply chain through foreign investments. Additionally, the strengthening US dollar, which has been appreciating against major currencies since the spring of 2021, will encourage cross-border transactions and fuel outbound investment. The strong US dollar has boosted the purchasing power of US companies and private equity firms, making foreign targets more attractive. Purchasers with US dollars to spend will be incentivised to engage in M&A activity abroad, particularly throughout Europe and Asia.

Headwinds for M&A in 2023

While certain favourable trends are expected to support M&A activity through 2023, it will also face some potentially significant headwinds this year.

Volatile equity markets

After a record-breaking year in 2021, global M&A activity slowed in part as a result of various macroeconomic factors, including the downturn in the global economy. Over the past year, global stock markets experienced their worst annual performance since the global financial crisis in 2008, with an estimated USD18 trillion of fallout. The S&P 500 finished 2022 down 19.4%. In addition to reducing aggregate M&A deal volume, the downturn in the equity markets led to an increase in all-cash deals, with over 75% of deals using cash-only consideration, representing an almost 20% increase since 2015 and a 9% increase from 2021.

Growth in the global economy is expected to remain weak by historical standards, as the fight against inflation and Russia’s war in Ukraine weigh on activity. However, the global economy showed signs of resilience during the start of the new year, with strong labour markets, robust household consumption and declining inflation. The International Monetary Fund revised its 2023 outlook, predicting that global growth will slow from 3.4% in 2022 to 2.9% in 2023 (up from its initial prediction of 2.7%), rebounding to 3.1% in 2024. Until equity markets stabilise, M&A activity will be hindered by uncertainty in the global markets.

Inflation and interest Rates

Inflation was one of the leading causes of the decline in M&A activity over the past year. The global inflation rate for 2022 is estimated to be around 9.4%, up from approximately 4.7% in 2021. Approximately 43% of countries experienced inflation rates over 10% in 2022. The battle against inflation is being led by central banks who have instituted contractionary monetary policies to curb demand. Approximately 33 central banks tracked by the Bank of International Settlements raised interest rates in 2022. In December 2022, central banks in the United States and the United Kingdom announced 50-basis-point hikes in policy interest rates. These tightening moves have brought the US Federal Reserve’s chief policy rate to a range of 4.75–5% in April 2023, the highest range since 2007. The Federal Reserve raised its policy rate five times over the course of 2022, marking the Fed’s most aggressive policy moves since the early 1980s. The range of the European Central Bank (ECB) is now 2% to 2.75%, and the Bank of England (BoE) has taken its base rate to 3.5%, which are the highest levels set by the ECB and BoE in 14 years. The inflation target remains 2% for all three banks, and officials and forecasters are predicting further rate hikes will come in 2023.

US antitrust

Following Biden’s issuance of the “Executive Order on Promoting Competition in the American Economy” in July 2021, the US Federal Trade Commission (FTC) and the US Department of Justice (DOJ) have taken a much more aggressive approach to antitrust enforcement. The FTC and DOJ promptly began a review of the Vertical and Horizontal Merger Guidelines in order to narrow the scope of transactions that escape regulatory oversight. Revised guidelines are expected to be published in 2023, but until then uncertainty remains over how anticompetitive behaviour is being identified and interpreted, and how exactly the agencies will view any given M&A transaction. Most recently, on 2 February 2, 2023, the DOJ announced that it would soon be withdrawing several policy statements issued between 1993 and 2011 that outlined antitrust “safe harbours” for permissible information-sharing among competitors in the healthcare industry.

The FTC and DOJ have also signalled a greater willingness to challenge M&A transactions and now have more resources to carry out their goals. In December 2022, Congress passed significant increases in the funding allocations for the FTC and DOJ, which will provide both agencies with additional resources to conduct their investigations and enforcement actions. To date, deals challenged by the FTC and DOJ include Lockheed Martin’s proposed USD4.4 billion acquisition of Aerojet Rocketdyne (abandoned by Lockheed Martin in February 2022), Nvidia’s proposed USD40 billion acquisition of ARM (abandoned by Nvidia in February 2022), United Healthcare’s USD13 billion acquisition of Change Healthcare (legal challenge defeated in court in September 2022), U.S. Sugar’s USD315 million acquisition of Imperial Sugar (legal challenge defeated in court in September 2022), the USD25 billion merger of Kroger and Albertsons Companies (the FTC made a second request on 3 December 2022), Microsoft’s USD69 billion acquisition of Activision Blizzard (the FTC filed suit on 8 December 2022), Booz Allen Hamilton’s USD440 million acquisition of EverWatch Corp. (legal challenge defeated in court in December 2022) and Meta’s USD400 million acquisition of Within Unlimited (legal challenge defeated in court in January 2023). The agencies’ success in court has been mixed, demonstrating that parties that choose to fight litigation may ultimately prevail. However, the FTC’s and DOJ’s greater willingness to bring litigation against transacting parties has complicated the US M&A regulatory landscape.

Developing global competition regimes

Global competition regimes have also experienced significant developments over the past year. In April 2022, the UK government proposed significant changes to its competition law, including proposed revisions to its jurisdictional thresholds and creating an additional basis for establishing jurisdiction to enable review of vertical and conglomerate mergers. The proposed reforms also included amendments that would facilitate the delivery of faster competition investigations and increased the penalties for noncompliance with the UK Competition and Markets Authority.

The European Commission (EC) has also signalled greater scrutiny of M&A transactions. In October 2022, Margrethe Vestager, the Executive Vice President for the EC, advocated for a renewed focus on a principles-based approach to EC competition policy. Whether in the context of introducing new rules or reviewing or enforcing existing ones, Vestager argued that going back to the principles enshrined in the European Union treaties would allow the EC to pursue multiple goals, such as fairness, maintaining competitive processes, consumer welfare, efficiency and innovation.

More generally, other countries are either reforming their competition law or increasing enforcement activities. Australian merger assessments are up by 39% above the four-year average of 2017 through 2020. Countries in the Middle East and Northern Africa have also made significant changes, with Egypt and Morocco expanding the scope of their competition law, Kuwait and Saudi Arabia increasing their merger enforcement activities, and Jordan and Lebanon hinting that they expect to enact new competition laws in 2023. General uncertainty regarding changes to counties’ competition regimes and a greater willingness of governments to challenge proposed transactions are likely to hinder M&A activity in 2023.

Foreign investment review

Last year brought significant change to the regulatory landscape in the United States and in jurisdictions around the world, particularly regarding foreign investment regulations. In September 2022, President Biden issued an executive order regarding Committee on Foreign Investment in the United States (CFIUS) review of national security risks associated with foreign investment in the USA, which was the first time that an administration provided formal guidance on the risks that CFIUS should take into account when reviewing a transaction. The order explicitly recognised that some countries use foreign investment to obtain access to sensitive data and technologies for purposes that are detrimental to national security.

Globally, certain countries, including Australia, Canada, Japan, New Zealand and the United Kingdom, have become more proactive in enacting, enforcing and widening their foreign direct investment (FDI) regimes. In addition to expanding the jurisdictions of FDI regulators, many countries have imposed additional mandatory notice requirements with respect to proposed transactions and have given regulators additional powers to block or otherwise impose conditions on transactions on the grounds of national security or other strategic interests. Most notably, the United Kingdom passed the wide-reaching National Security and Investment Act that went into effect in the first quarter of 2022, which expanded the scope of FDI review beyond just M&A activity to give regulators the power to scrutinise minority investments and the acquisitions of assets such as land and intellectual property. In 2023, the expansion of FDI regimes in the United States and abroad will likely extend the timeline to closing as well as cause transactions that historically escaped review to face new scrutiny. Going forward, cross-border deals will require a careful review of evolving international FDI regimes in order to properly evaluate regulatory risk and to structure transactions appropriately.

Concluding Remarks

Following a record-setting year for M&A in 2021, 2022 saw a slowdown in activity, with a significant drop-off during the last six months of the year. However, despite the relative slowdown, several factors point to the potential for a rebound for M&A markets in 2023: historic levels of private equity dry powder ready to be deployed for investments, a significant number of SPACs looking for targets to complete business combination transactions, and the continued prevalence of divestitures and corporate carve-out transactions. There are several headwinds facing M&A markets this year, the most significant of which is likely to be the increasingly complicated regulatory landscape, which will require transacting parties to dedicate significant resources to navigate evolving antitrust and FDI regimes. Headwinds also include various macroeconomic factors, including contractionary monetary policy, high interest rates and volatile equity markets, as well as heightened geopolitical tensions as a result of Russia’s invasion of Ukraine and the deterioration of US-China relations. Even in a challenging regulatory and macroeconomic environment, transacting parties that remain flexible and creative in structuring transactions will be well positioned to execute on M&A opportunities in 2023.