The state of Global M&A in 2023 and future outlook
In the dynamic world of global finance, Mergers and Acquisitions stand as one of the barometers of economic vitality and strategic maneuvering. The year 2023 was no exception, witnessing a rollercoaster of M&A activity amid shifting economic tides and geopolitical uncertainties, with the narrative marked by resilience and adaptation. This article aims to dissect the intricacies of M&A in 2023, along with exploring the 2024 outlook, delving into deal volumes, values, sectors, and regional dynamics to uncover underlying trends and insights, with a particular focus on the Indian market.
Global M&A 2023
To put it plainly, 2023 was a dull year for mergers and acquisitions, with the market falling to $3.16 trillion, the lowest level in a decade. Dealmakers faced their most prolonged difficulties since the 2008–2009 financial crisis. Deal activity witnessed an extended decline that peaked in the first quarter of 2023 due to a combination of factors including rising interest rates, geopolitical tensions, recession fears, and increased regulatory scrutiny.
While total deal value and volume globally fell even further from already low levels of 2022, average deal size increased because of a few outliers. The number of companies involved in dealmaking also fell drastically, showcasing decreased interest.
The decline commenced as a result of the Federal Reserve Bank, the central bank of the United States, on June 16, 2022, unexpectedly raising interest rates to curb inflation. In the US, from 0.25% in April 2022, interest rates rose to 5.5%. Internationally, owing to the dollar’s significance in international trade, other central banks followed suit.
After a decade of predictability, this sudden move led to uncertainty in the market. To add to that, a second straight year of dip in valuations made dealmakers hesitant. At a multiple of 10.1 times, lowest in 15 years, sellers didn’t feel like they were getting their worth. Thus began a game of chicken. While sellers had no reason to discard value, buyers needed deals to give them greater assurance among high-interest rates. This led to a lasting gap in valuations between the dealmakers.
Thus, after a great 5 months and a half, M&A activity around the world toppled off, resulting in calendar H2’22 closing off at $1.446 trillion compared to calendar H1’22’s massive $2.205 trillion.
This slump carried off into 2023. Dealmaking during the first eight months was disappointingly subdued, to say the least. By the end of August 23, companies had thus far announced deals to the tune of $1.18 trillion, a staggering 41% plummet from the same period in 2022. The number of deals valued at more than USD 10 billion also declined, from 27 to 17.
However, the slump started showing signs of recovery with Splunk, a data insight and observability platform developer, in September, receiving an acquire proposal from Cisco Systems, in a deal valued at around $28 billion. The deal cemented itself as the biggest technology deal globally of 2023. Following that, the two largest deals of 2023, both from the energy sector, were announced in October. These were Exxon’s acquisition of Pioneer for $59.5 billion and Chevron’s buyout of Hess for $53 billion. Both transactions were completed utilizing 100% stock payments, a strategic decision particularly apt given the significant surge in interest rates.
Hence, globally, M&A started inclining as the year closed. While global value jumped 41% from Q3 to Q4, a 37% increase from the previous year, to 1 trillion, the number of companies involved also increased by 7% compared to Q3 2023. Additionally, the average deal size jumped by 32% to $550 million.
Global M&A deal value picked up pace as we progressed deeper into 2023. The latter months of 2023 narrowed the gap between the 2 years, in part because of the slowdown that happened in calendar HY2’22 after the Federal Reserve Bank went on an interest-raising spree, but majorly due to increased financial confidence within dealmakers, validated by declining inflation and expectation of decrease in interest rates, combined with pent-up demand for deals.
The volume of deals, however, presented a stark contrast to the discussed deal values, remaining relatively stable. This was largely attributed to a surge in mid-market transactions, which were favored due to their feasibility amidst challenging financial and business landscapes. These smaller-scale deals shared a common objective with their larger counterparts: driving growth and facilitating transformation. Mid-market enterprises, those with revenues of up to $1 billion, accounted for almost half of all M&A activity.
Global M&A activity segmented by sectors
2023 shaped out to be a particularly intriguing year for M&A within specific sectors. One of these was the Oil and Gas sector. Despite a 6.2% decrease in volume, there was a remarkable surge of 98.3% in deal value. This notable increase was primarily attributed to the sector witnessing the two largest M&A transactions of the year, which were mentioned earlier.
On the other hand, Technology saw a sharp decline of –48.2% in total deal value, while rising by 1.1% in deal volume. This sector saw a spike in mid-market deals with more and more companies looking to integrate tech into their core operations. The largest tech deal of 2023 was Cisco’s US$28.1bn proposed acquisition of Splunk, talked about earlier.
In the Pharma sector, small to midsize biotech companies seem to have caught the eye of large-cap companies looking to fill drug-pipeline gaps. Interest around diabetes and weight loss GLP-1 drugs seems to be increasing.
Global M&A activity segmented by region
The Americas led global M&A activity in 2023, comprising over half of the market. Despite a 7% decline in deal value to $1.6 trillion, activity remained robust, with significant acquisitions and mega-deals. Large deals were a common trend, with 11 of the world's top 20 deals originating from the region. Although the number of deals decreased by 32%, the average deal size increased by 38% to around $670 million.
In contrast, Europe and the Middle East faced challenges due to macroeconomic impacts and geopolitical conflicts, with M&A activity falling by 30% to $721 billion. Deal volume also dropped by 29%, with the average deal size remaining stable at approximately $400 million.
The Asia Pacific region saw a 19% decrease in M&A value to $734 billion, reaching its lowest level in a decade. However, the region attracted more acquirers from outside, particularly in fast-growing economies like India. Japan experienced a notable 49% increase in activity, while China's contribution to overall deal value decreased to 40%, the lowest in five years. Energy and materials, advanced industries, tech, media, telecom, and financial services comprised about two-thirds of deal value in the APAC region. Despite diverse business environments, APAC's share of global deal value increased to a quarter, up from 15% two decades ago.
Global outlook for 2024
January is normally a slow month for deal announcements, but in 2024, multiple big deals have already come to light. Among these are the US$14 billion acquisition of Juniper Networks by Hewlett Packard Enterprise, the US$12.5 billion acquisition of Global Infrastructure Partners by Blackrock, the US$7.4 billion merger between Southwestern and Chesapeake Energy, and the US$6.4 billion equity investment in Vantage Data Centres by DigitalBridge and Silver Lake.
Two primary factors have contributed to the uptick in dealmaking in recent months, leading industry leaders to view 2024 as an opportune year. Firstly, there has been a recent improvement in financial markets, driven by a deceleration in inflation, along with expectations of declining interest rates as was mentioned earlier. Secondly, there is a pent-up demand for deals, crucial for companies aiming to shape their future trajectory.
To add to that, according to MSCI, Private Equity firms are sitting on approximately USD 1.9 trillion in dry powder awaiting deployment. Additionally, the S&P Index has been reaching record highs of late. Corporate balance sheets are strengthening, fostering increased confidence.
However, despite the favorable conditions and optimistic outlook, financing is more costly than it has been in the past decade. Consequently, dealmakers now must generate significantly greater value to achieve comparable returns. Thus, evaluating risks and taking decisive action, rather than waiting for greater clarity, becomes imperative.
Prevalence of ESG in M&A
An emerging trend in M&A is "Green Dealmaking." While Green Dealmaking has experienced consistent growth in the past couple of decades, its importance is now greater than ever. Companies are increasingly using M&A as a tool to address decarbonization, the energy transition, clean technology, and the circular economy. A recent example is ExxonMobil's acquisition of Denbury Resources for $4.5 billion, underscoring the company's ambition to expand into the carbon capture and storage sector.
State of Indian M&A in 2023 and outlook for 2024
Interest rates in India climbed from 4.5% in April 2022 to 6.5% in September 2022, mirroring the global trend of tightening monetary policies. Nevertheless, India's M&A landscape diverges from this global narrative. While developed countries averaged GDP growth rates of 1-2%, India maintained a rapid pace at 6-7%. At first glance, India's M&A deal value in 2023 plummeted by a staggering 27%. However, a closer look reveals some nuance, with the figure dropping to a mere 4% when excluding outliers such as the 2022 HDFC Ltd. & HDFC Bank merger and the 2023 Jio de-merger.
Deloitte's 10th M&A trends survey showed that 68% of respondents in South and Southeast Asia foresee heightened M&A activity in 2024 compared to 2023, in stark contrast to the global figure of 47%. This sustained business confidence, bolstered by robust GDP growth rates, is partly attributable to an upward trajectory in global indices like the PMI and the BCI.
The increase in interest rates and political uncertainty stemming from forthcoming elections in India prompted dealmakers to steer clear of large-scale bets. Midmarket deals, valued between $100 million and $1 billion, surged from 20% in 2022 to constituting 35% of total M&A activity, resulting in a 14% downturn in average deal value. Particularly noteworthy is the financial services sector's significant shift, with mid-market deal value soaring by 192%, primarily driven by the stock brokerage and insurance sectors.
While escalating capital costs impacted private equity, leading to a 20% YOY decline in deal value, this decline was partially offset by a remarkable 95% surge in deal value in the renewable energy sector, bolstered by government initiatives.
India's outbound M&A sector experienced a robust 10% year-on-year growth. This surge was primarily fueled by strategic buyers from the US, the Netherlands, and Germany, with these three nations alone contributing approximately 65% to the strategic inbound value. The focal points of this activity were the FS, TMT, and manufacturing sectors. Additionally, investments surged, buoyed by heightened interest in the fintech and e-commerce sectors, supported by robust local demand and favorable policies. On the other hand, private equity activity was predominantly centered around the energy sector.
While the outbound sector thrived, inbound M&A witnessed a notable decline of around 49%. This downturn can likely be attributed to heightened caution amidst global uncertainties.
Taking a sector wise look at Indian M&A
In the financial services sector, if we exclude the outlier deals, the sector surged by 107% in deal value, signaling the rise of financial services and fintech in India. Financial Institutions are looking to widen their portfolios, with credit demand increasing and NPAs falling. Large-scale consolidations and corporate restructurings were the primary factors driving strategic deal volume in the FS sector. Such transactions contributed 90 percent in 2022 and 59 percent in 2023, to the overall deal value in the FS sector.
In the technology sector, deals were mainly focused on buying and integrating emerging technologies like AI, ML and Data Science.
The Energy sector saw a sharp incline, driven mainly by renewable energy. A government favorite, renewable energy alone contributed more than 70% of deal value in this sector, mainly inbound PE deals.
In the Medical and Pharma sector, hospitals and clinics looking to expand capacity in up-and coming cities emerged as the flagbearers.
In the Industrial and Manufacturing sectors, the automative segment primarily led the growth, getting a stream of FDI inflows. Cross-border deal value in manufacturing shot up by 97%, mainly driven by strategic acquisitions in the electric and component area.
Experts hold an optimistic outlook for M&A in India, viewing it as likely to improve further after the general elections this year. Healthcare, Green energy, Financial Services, digital economy and the E-commerce sector are likely to lead the way. Growing disposable income within the country and favorable government policies have been and will continue to facilitate growth.
Conclusion
In conclusion, while M&A hit a low point in 2023, witnessing its lowest level in a decade, it has started to rebound. While the Americas are forging ahead with recovery, Europe may take some more time. Conversely, Asia saw the least impact from the global scenario, with its share in the global market witnessing a significant rise. Despite uncertain variables, companies that create tangible value will continue to find opportunities and emerge ahead. Looking ahead, dealmakers will continue to utilize M&A to generate value, focusing on transformational deals driven by sustainability and digital initiatives.
Pratham Arora is a Junior Analyst at IFSA Hansraj
Abbreviations
GDP - Gross Domestic Product
PMI - Purchasing Managers' Index
BCI - Business Confidence Index
PE - Private Equity
TMT - Technology, Media, and Telecommunications
FS - Financial Services
ML - Machine Learning
AI - Artificial Intelligence
NPA - Non-Performing Assets
FDI - Foreign Direct Investment
Glossary
Mergers and Acquisitions: The process of consolidating companies or assets through various financial transactions such as mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions.
Deal Value: The total monetary worth of a merger or acquisition transaction, or the total monetary value of all mergers and acquisitions within a certain period.
Deal Volume: The total number of mergers or acquisitions completed within a certain period.
Mega-Deal: A merger or acquisition transaction with an exceptionally high value. In this article, it refers to deals exceeding $5 billion in value.
Average Deal Size: The average monetary value of individual mergers or acquisitions within a given period.
Dry Powder: Uninvested capital held by private equity firms, typically earmarked for future investments.
Green Dealmaking: Mergers and acquisitions focused on environmentally sustainable practices, clean technology, and renewable energy.
Mid-Market Deals: Mergers or acquisitions involving companies with moderate market capitalization or revenue, often valued between $100 million and $1 billion.
Outbound M&A: The acquisition of foreign assets or companies by domestic entities.
Inbound M&A: The acquisition of domestic assets or companies by foreign entities.
Financial Institutions: Entities such as banks, insurance companies, and investment firms that provide financial services to individuals and businesses.
Non-Performing Assets: Assets that are not generating income or are in default, typically loans that borrowers have failed to repay.
Cross-Border Deal: A merger or acquisition involving companies from different countries.
Private Equity: Investment in companies that are not publicly traded on a stock exchange, often involving the purchase of a significant stake in the company.
Valuation: The process of determining the economic value of a company or asset.
Conglomerate: A corporation that owns a diverse range of unrelated businesses.
Monetary Tightening: Central Banks’ actions to reduce the money supply and control inflation by increasing interest rates and reducing asset purchases.
Divest: To dispose of or sell off assets, investments, or business interests for strategic, financial, or ethical reasons.
References
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