The first six months of this year have seen global deal values decline by 20% on the first half of 2021, and they look set to fall further as global markets price in the economic fallout. Deal volumes have done better, dropping back to healthy pre-pandemic levels. Perhaps even more telling than these statistics is the fact that the number of megadeals (those with a value of more than USD 5 billion) declined by almost 40% between the second half of 2021 and the first half of 2022 as executives became more cautious and regulatory scrutiny tightened in various key markets. Growing uncertainty, higher energy costs and lower investor confidence have also slowed activity at the EMEA level (see chart).
A reset of M&A volumes and values in 2022
Deal volumes and values, 2018–2022
“Mid-market M&A activity is still running at on a high level, although increased uncertainty is leading to more cautious deal-making."
Two big issues for business leaders in general and dealmakers in particular:
1. Inflation changing the game
With inflation in many countries at a 40-year high, a generation of business leaders are experiencing an inflationary market for the first time are and having to respond accordingly. Now that inflation threatens to erode company earnings and shareholder returns, dealmakers have to take a different approach to the familiar, historical approach to due diligence. Valuations will now have to take both present and expected future inflation into account, which means forecasting different inflation scenarios and assessing the impact on operations and earnings using real-time analytics.
It’s crucial to understand the wider, game-changing implications of inflation in terms of market share, price elasticity, customer and supplier relationships, and employee compensation and retention. Only that way can you assess how a company is managing prices, costs and cash flow in response to an inflationary environment.
2. Workforce strategy is now a priority
Companies are increasingly using mergers and acquisitions to find the right talent. Added to that, the pandemic has empowered labour. All this means that dealmakers now have to make workforce strategy a greater priority. Research by PwC has revealed that workforce is the number one risk to growth. The big topics to keep an eye on are high wage inflation, the “great resignation”, shortages of skills and increased stakeholder interest in diversity and inclusion.
Dealmakers therefore have to actively address workforce matters. It’s important to remember that topics such as workforce composition, compensation and benefits, and future organisation design and culture all impact future business performance – now more than ever before. The impact of a deal on the workforce used to often be neglected. Now dealmakers have to think much more carefully about things like culture, recruitment, retention and development, compensation and benefits and how they will affect long-term value creation.
What’s the mid-year outlook for mergers and acquisitions in Switzerland?
Financial market volatility, inflationary pressures, rising interest rates, supply chain disruptions and geopolitical tensions all appear to be here to stay. If you want to unlock future growth, sitting things out won’t help. We believe it’s time for dealmakers to reset their priorities and make bold moves to win targets that matter most to their business or portfolio, and use M&A to pursue opportunities that can deliver value in a challenging economy.
The bar has got higher in terms of successful dealmaking. The days when returns were generated simply through the passage of time are over. However, we still believe that M&A will remain a strategic priority for companies seeking to transform, grow and lay a firm foundation for the future. The winners will be those that act with speed, agility and intelligence to navigate the current challenges.