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| Nathalie Negre-Eveillard |
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| Michael Deyong |
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| Ferdinand Mason |
Against the odds, global M&A delivered a solid performance in 2022, but after weathering the initial wave of market dislocation, macroeconomic volatility has caught up with deal makers this year.
After a decent 2022 that saw global M&A value come in at $3.81 trillion, the third-highest annual deal value total since the 2008 credit crunch, corporate and private equity deal makers have hit the brakes in 2023 in the face of persistent inflation, sustained high interest rates and the ongoing fallout from the war in Ukraine.
There were 5,974 deals globally in the first quarter of 2023, a year-on-year decline of 29% and the lowest quarterly tally since the third quarter of 2020.
The drop in aggregate deal value has been even more precipitous, with the first quarter of 2023 deal value falling 40% to $646.3 billion. This is the lowest figure since the depths of the coronavirus pandemic and falls below any quarterly total going back to the first quarter of 2016.[1]
Pricing Dips and Deal Delays
The drop-off in deal value and volume in 2023 is reflective of the building headwinds that have led to protracted deal processes and deterred deal makers from coming to market.
According to the WTW "Quarterly Deal Performance Monitor — Q1 2023," transactions in the first quarter took longer to close than at any time since 2008.[2]
When deals have closed, prices have been lower than a year ago, with pricing for private equity transactions and smaller deals below the $100 million threshold particularly hard hit.
According to PitchBook, the average prices for deals valued at less than $100 million were down by around a third over the 12 months to the end of the first quarter of 2023.[3]
Vendors, particularly private equity sponsors, have been loath to sell assets at lower valuations, with the widening delta between buyer and seller pricing expectations having a chilling effect on deal flow.
Rising interest rates, meanwhile, have a direct impact on the availability and cost of financing for M&A. European issuance of leveraged loan finance for buyout and corporate M&A dropped from $129.75 billion in the first quarter of 2022 to just $19.77 billion, an 85% year-on-year slide.[4]
The decline in the availability of liquidity has proven especially challenging for private equity deal makers, who rely on leverage to enhance returns, and has curtailed private equity's firepower to pursue deals.
Antitrust Risk Intensifies for Corporates
In addition to the lack of visibility on a deal target's future earnings, and valuation and financing uncertainties, corporate deal makers also have had to contend with high antitrust deal risk following a period of antitrust regulators intensifying deal scrutiny.
Microsoft Corp.'s proposed $69 billion acquisition of Activision Blizzard Inc., the video game producer of Call of Duty, for example, was blocked by the Competition and Markets Authority, the U.K. antitrust regulator.
EU antitrust regulators have also been proactive, charging Google LLC with anti-competitive practices[5] and voicing concerns about Booking Holdings Inc.s' planned purchase of the Swedish online travel agency Etraveli Group.[6]
Meanwhile, in the U.S., antitrust authorities filed a record 13 complaints against transactions in 2022, more than double the average of six recorded over the previous five years, according to Bloomberg.[7]
Down But Not Out
For all the difficulties that deal makers have encountered in 2023, however, M&A markets have by no means closed up shop.
There is no denying that deal making has declined this year, but it is important to remember that 2021 and 2022 were both unprecedented, record-breaking years for M&A activity.
Looking back on the last decade, the first quarter of 2023 deal figures are not far off long-term averages.
For high-quality deal targets in transactions that are underpinned by solid, long-term strategic drivers, deal makers have not held back from transacting, with a PwC survey of global chief executives showing that 60% of respondents did not plan to delay strategically important deals.[8]
German life sciences company Sartorius, for example, paid $2.6 billion for Polyplus Transfection, a French company developing viral vectors for cell and gene therapies, and Italy's Chiesi Farmaceutici SpA landed a €1.17 billion ($1.27 billion) deal for Irish pharma company Amryt Pharma PLC.
The deal is illustrative of the ongoing requirement for corporates in the life sciences sector to refresh drug portfolios and avoid patent-expiration cliffs, irrespective of wider volatility.
Notable private equity deals include a €1.37 billion bid for Finnish construction company Caverion Corp. from Triton and Platinum Equity's €930 million move for the high temperature solutions unit of French industrials company Imerys SA.[9]
Despite tighter debt markets, the right credits are also still securing financing. At a New York conference in February, panel speakers noted that investment grade borrowers continued to secure strong lender support from bank syndicates for all-cash acquisitions worth up $100 billion and more.[10]
The market has been tougher for noninvestment grade borrowers, but credits with BB ratings — the highest credit rating for a noninvestment borrower — have still been able to pull together debt packages in the $10 billion to $15 billion range, supporting still sizable deals with enterprise values of around $20 billion.
Public-to-Privates In Play
Private equity firms, meanwhile, have adapted to shifting market dynamics by focusing resources on public-to-private and buy-and-build transactions.
Choppy stock markets have seen valuations of public companies drop off significantly from 2021 levels, presenting compelling opportunities for private equity firms to take these assets private at attractive entry valuations.
Big-ticket take-privates led by private equity firms this year include announced EQT Corp.'s £4.6 billion take private of U.K. veterinary medicines company Dechra Pharmaceuticals PLC and completed Providence Equity Partners LLC £418 million move for event business Hyve Group PLC.[11]
According to analysis from Global Ltd., overall private equity deal value numbers have been dominated by take-private transactions. Take-privates have represented 81% of total private equity deal flow in 2023, up from 37% in 2022 and significantly ahead of the 20% figure in the typical year.[12]
At the conference in New York it was noted that public-to-private activity has not only been limited to domestic markets, with private equity sponsors looking abroad for public-to-private targets too.
A strong dollar and the attractive valuations of listed European companies relative to similar assets in the America have presented attractive buying opportunities for inbound U.S. buyers, in particular.
In addition to take-private deals, private equity firms have also doubled down on buy-and-build strategies. Rather than chasing large targets that require significant support from financing markets, buyout firms have sustained deployment by investing in platform companies that provide a foundation to consolidate industries through a series of smaller add-on deals.
Bain & Co. figures show that add-on deals accounted for 72% of all North American buyouts in 2022, the highest level in a decade.[13]
In difficult markets smaller deals not only present lower execution risk but can also be financed from balance sheets rather than febrile debt markets.
Sponsors have also noted that bigger companies trade for higher earnings multiples than smaller ones, presenting additional upside on exit, once a consolidation play has been completed.
Deals markets may be difficult, but deal maker ingenuity and the ability to step back and take a longer view show that where there is a will, there is a way.
Nathalie Negre-Eveillard, Michael Deyong and Ferdinand Mason are partners at White & Case LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] https://whcs.law/3JhIkfK.
[2] https://www.wtwco.com/en-us/insights/2023/04/q1-2023-m-and-a-buyers-defy-uncertainty-with-bullish-optimism-for-2023. See par 8.
[3] https://pitchbook.com/news/reports/q1-2023-global-ma-report. See page of downloadable pdf.
[4] https://whcs.law/45SQogw.
[5] https://asia.nikkei.com/Business/Technology/Google-faces-EU-breakup-order-over-anti-competitive-adtech-practices.
[6] https://www.reuters.com/markets/deals/eu-antitrust-regulators-open-full-scale-probe-into-booking-holdingsetraveli-deal-2023-06-09/.
[7] https://www.bloomberg.com/news/articles/2023-05-10/m-a-deal-pace-slows-as-biden-administration-cracks-down-on-antitrust.
[8] https://www.pwc.com/gx/en/news-room/press-releases/2023/2023-global-ma-industry-trends-outlook.html.
[9] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/european-m-a-activity-limps-into-2023-74215040.
[10] Hosted by White & Case LLP and Goldman Sachs International. Navigating the European M&A Landscape: Strategies for Success in 2023, February 2023.
[11] https://www.ft.com/content/d60d6866-920d-4617-a693-0f73b3f24eea.
[12] https://www.ey.com/en_gl/private-equity/pulse. See para 7 and figure 2.
[13] https://www.bain.com/insights/private-equity-outlook-global-private-equity-report-2023/. See fig.13.
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