Merger and acquisition activity in the first half of 2022 slowed from the sizzling pace in 2021. With Russia invading Ukraine, inflation and interest rates soaring, and the stock market turning bearish, deal makers faced headwinds from multiple directions. Global deal volume fell 26 percent while deal value dropped 30 percent from the first half of 2021. But as the year progresses and worries about recession grow, appetite for deal making has hardly disappeared, according to 360 U.S. business leaders KPMG surveyed at the end of May.
Key M&A trends in the second half of 2022
In our mid-year survey, 61 percent of executives see M&A activity increasing significantly or somewhat in their industry in the next 12 months, with IM respondents most bullish at 68 percent. However, when asked what is their company’s plan for M&A in the coming year, 51 percent of all respondents say they will increase deal making activity somewhat (46 percent) or significantly (5 percent).
This divergence in business leaders’ optimistic outlook and their more conservative plans is largely due to inflation, rising interest rates, and uncertain macroeconomic conditions. While 65 percent of respondents said that the Russia-Ukraine war has affected their business, the biggest concerns remain inflation and its economic consequences. Some three-quarters (73 percent) of executives say inflation has hurt their company’s margins. Almost half of respondents (47 percent) believe that there is more than a 50 percent chance of recession before the end of 2022. The most pessimistic are executives in C&R and TMT with 60 percent and 58 percent of respondents, respectively, saying a recession will begin before the end of 2022.
Whether there will be a severe economic slowdown or an outright recession, it is clear that deal making and deal execution will become more challenging. In particular, deals that are predicated on revenue synergies or that involve ambitious strategic goals—like transforming business models—will require the highest levels of expertise. It will be critical for deal teams to have deep experience with target identification, diligence, and value capture.
In the coming months, deal makers will have to navigate a more unpredictable M&A landscape than they’ve grown accustomed to in the past couple of years. As corporate profits are squeezed from rising input costs and financing for deals become more costly, future M&A trends probably will diverge from our survey respondents’ expectations and deal activity is likely to cool off. If there is a recession, it will further slow deal making.
Yet a cautious optimism may be justified. The unemployment rate is expected to stay low, and this bodes well for healthy consumer spending through 2022. Meanwhile, if inflationary pressures—especially energy prices—start to ease, the Fed could slow the pace of rate hikes. The economy still may avoid a recession.
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