The value of U.S. deals totaled $1.2 trillion during the first three quarters of this year, the slowest nine months in two years and a 40% decline compared with the same period last year, according to third quarter data from Refinitiv.
In the face of high inflation and rising interest rates, dealmaking showed "significant resiliency" during the third quarter even though total transactions fell to 210 compared with 264 during the third quarter of 2021, Willis Towers Watson (WTW) said in a Tuesday release, citing Refinitiv data.
By the end of the third quarter, the stock price of acquiring firms involved in deals valued at more than $100 million outperformed the broader market by 3.9 percentage points, according to WTW. The data indicates a return to “healthy pre-pandemic levels” in 2022 following the “record-setting pace of 2021 driven by exceptional conditions,” WTW said.
The low volume in deals during the third quarter highlights caution among prospective acquirers and investors, according to WTW. Markets show “a ‘flight to quality’ as investors avoid high-yield and exotic assets,” Duncan Smithson, senior director mergers and acquisitions for WTW, said in a statement.
Approaching M&A with caution
The emphasis on quality may be one of the explanations for a persistent slump in mega-deals. During the first nine months of the year, worldwide M&A deals valued between $1 and $5 billion totaled $770.6 billion — a two-year low, according to Refinitiv data.
Additionally, no deals exceeding $10 billion were completed during the third quarter, WTW data shows, the first time this has occurred since the second quarter of 2019.
Though acquirers are likely sidestepping the risks of larger, more complex deals in this current environment — as well as further scrutinizing their due diligence processes — plenty of “dry powder” remains in M&A for discerning investors, Smithson said.
Many investors may see buying opportunities in the current environment as other buyers pull back in the face of inflation, potential stagflation and a possible recession, he said, predicting that dealmakers in coming months will focus on such sectors and themes as technology, environmental, social and corporate governance (ESG) and “recession-proof” opportunities.
August data from Hampleton Partners shows that despite market turbulence M&A deals focused on ESG software and related products hit the highest level since 2017, CFO Dive reported.
Technology still drives M&A
Although M&A activity focused on technology has dropped along with transactions involving other sectors, technology companies still capture investors’ interest. Technology sector deals represented a record 22% of overall M&A during the first three quarters, while total value of the transactions fell 30% compared with the same period last year for a total valued of $609.1 billion, according to Refinitiv data.
The technology areas capturing investor interest may be shifting. Data released Wednesday from Hampleton Partners found digital commerce M&A has steadily declined during the past few quarters. Global M&A deals in this space dipped to 544 in the second quarter — a 22% slump from the 699 recorded during the prior quarter — and totaled just 410 deals for the third quarter.
Inflation, supply chain bottlenecks and related pressures saw the value of e-commerce stocks tumble, Ralph Hübner, sector principal for Hampleton said in a statement, contributing to a pullback in traffic for the digital commerce M&A market.
“We’re going to see an evolution and a transformation of the Digital Commerce M&A market,” Hübner said in a statement. “Buyers will continue to buy, but will do so with different motivations, at more considered valuations, and with different investment criteria.”
