Key highlights for H1’22
The uncertainties of 2022 have led to a very slow first half for M&A
The first half of 2022 saw ~USD 2.2 trillion of M&A deals being announced, ~21% lower than the same period last year and the slowest opening six months for M&A in two years. Technology, financials, and industrials accounted for almost half the total deal value in the first half of 2022. Global activity suffered due to noticeable macroeconomic headwinds, as investors and companies dealt with persistent inflation, weak capital market performance, geopolitical tensions, a looming recession, pandemic-induced supply chain issues and lower valuations. However, mega deals held up well, with USD 10 billion+ deals rising 11% YoY, making this the best period for mega deals in the last three years.
Debt capital market (DCM) performance was similar to pre-pandemic levels
Overall global debt issuance declined by ~14% YoY to USD 4.8 trillion (in line with pre-pandemic levels), and the number of issues were down by ~7% YoY. Investment-grade corporate debt suffered its slowest first half since 2019. High-yield instruments suffered even more, with issuance dropping by 78% YoY, making it the slowest first half since 2009. International bond offerings fell by 28% YoY to USD 2.2 trillion; Asia local currency bond offerings, however, grew by 23% to USD 1.9 trillion, the highest level since records began in 1980 and the solitary bright spot in an otherwise bearish global market.
Equity issuance crashed across regions
Equity capital markets (ECM) witnessed the slowest opening first half since 2005, with a huge ~67% YoY decline. The U.S. was particularly hard hit, with an 85% fall; Chinese issuance suffered a 55% decline to USD 83 billion, but still took its largest percentage share of activity in any first half period. Double-digit declines were the norm in the EMEA as well, with issuance down 68% to a 26-year low. This was surpassed only by Japan, which saw a 72% decline with just USD 4.1 billion raised, and the weakest half-year total since the start of its ‘lost decade’ in 1992. The U.S. IPO window has all but closed, with a 95% YoY drop in listings to raise just USD 4.3 billion, as investor sentiment sours on tech stocks. Globally, IPO proceeds declined by 67%, bringing the market back down close to pre-pandemic levels.
Top 5 M&A deals in H1’22
Volatile market conditions caused a sharp decline in investment banking business
The investment banking revenues of all the major investment banks fell in Q2’22, as deteriorating global market conditions saw lower fees from equity and debt underwriting. A halt in deal making amid heightened fears of a recession, rising inflation and a volatile market caused by the ongoing Ukraine conflict were the chief reasons for the decline.
Q2’22 – Investment banking revenues and YoY change
Advisory firms had a mixed second quarter due to the challenging macro environment
Evercore and Houlihan Lokey witnessed growth in advisory revenues in Q2’22, while revenues for all other major advisory firms declined. Firms recognise the increased risk associated with the current geopolitical, economic and market headwinds, but they remain confident that their growth strategies will generate returns for shareholders. Fundamental themes likely to drive M&A activity in the medium to long term remain intact, and companies are accordingly strengthening their internal teams and hiring senior executives for deal execution.
Q2’22 – YoY change in advisory revenue
ESG issues are becoming prominent in M&A deals
ESG is becoming a primary cause for an increase in M&A deals, with the enhanced capital being utilised to transition to greener sources of energy that in turn may create M&A opportunities. M&A deals are expected to extend in industries transitioning to new business models, such as oil and gas, where the major companies could pivot toward renewables, hydrogen and technology.
Macroeconomic and geopolitical factors slowed down ECM deals
The global economic slowdown, inflation and interest rate hikes by central banks delayed the IPO pipeline. The continuing IPO freeze may result in a slump in ECM volumes and charges, which is unlikely to change in H2’2022. Global bond sales too are expected to decline due to inflation, supply chain disruptions, concerns over rate hikes and the Russia-Ukraine crisis.
The Russia-Ukraine conflict has led to short-term challenges for investment banks
Russia’s invasion of Ukraine has created challenges for investment banks looking to grow their revenues this year, due to the resultant slowdown of IPOs and SPAC deals. Furthermore, this has put short-term pressure on global M&A deal activity. A decline in Russia’s M&A activity is unlikely to impact global M&A volume. However, the rest of the world is expected to put a stop to the execution of the M&As required to attain scale and synergies.
Attracting and retaining a skilful workforce are becoming priorities
A growing priority for deal making in H2’2022 is attracting and retaining a skilful, talented workforce. This is especially true because companies face workforce-related challenges such as high wage inflation, attrition, shortage of skills and increased stakeholder spotlight on employee diversity and inclusion.
Regulatory scrutiny is creating hurdles for cross-border M&A deals
Several countries are tightening their regulatory frameworks, which is creating headwinds for dealmakers in 2022. Rising protectionism may make it more challenging to get approvals for cross-border M&A deals, leading to a greater focus on domestic deals.