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August 30, 2022 5 minute read

How the Current Economy Impacts Q3 and Q4 2022 M&A Market

At the beginning of 2022, many dealmakers expected that this year, mergers and acquisitions (M&A) would rise and prosper after overcoming the headwinds experienced in 2020 and 2021. Unfortunately, the first half of 2022 has also been plagued by various issues, from the Russian-Ukraine war to rising inflationhigh-interest rates, persistent supply chain issues, and falling stock prices.  These issues have affected the M&A market, prompting dealmakers to rethink their strategies in the last two quarters of 2022. This article focuses on the current economy’s impact on the Q3 and Q4 2022 M&A market.  

How Supply Chain Issues Affect M&A

Towards the end of 2020, the semiconductor shortage began to affect manufacturing worldwide. Some of the hardest-hit sectors by the chip shortage are auto, consumer electronics, LEDs and lighting fixtures, and power (solar and turbines).  

In 2022, global supply chain issues persist. The Russian-Ukraine conflict has even worsened the problem by disrupting the supply of gold, silver, nickel, and other materials used in chips. As manufacturers search for ways to overcome the crisis, there has been an increase in M&A in the first half of 2022, and experts expect the same in the remaining half. 

Below are some of the factors that are driving semiconductor M&A

  • Growing demand for foundries and custom chips 
  • Economies of scale and the need to pool resources to tackle the rising costs of manufacturing 
  • Need to ensure supply chain security 
  • Desire to acquire highly specialized talent 

Some of the notable mergers that have been driven by chip shortage in 2021 and 2022 are: 

  • Qualcomm, a 5G cellular tech provider, acquired Nuvia, a manufacturer of CPUs and chip systems (March 2021) 
  • Intel acquired Tower Semiconductor, a foundry based in Israel (February 2022) 
  • Cepton, a provider of lidar-based solutions for a wide range of industries such as automotive and smart cities, went public through a special-purpose acquisition company (SPAC) merger (February 2022)  

Impact of Inflation on M&A 

Since 2021, inflation rates in the US have been on the rise. According to Statista, prices in the US increased by 8.5% in July of 2022 compared to July 2021, and the trend is expected to continue for the remaining part of the year. Rising inflation is always a cause of concern as it weakens a currency’s value, reducing its purchasing power.  

As inflation continues to rise, here are three ways it has affected M&A and will continue to affect Q3 and Q4 2022 M&A market. 

Buyers are Offering Lower Purchase Prices 

When inflation rates are high, the cost of running a business also rises. Buyers understand this, so they offer lower purchase prices during M&A. Evidently, the value of M&A had the most significant decline in February this year, with a 74.4% drop-off in the financial sector. Buyers may reference this trend in their negotiations.  

Longer Exclusivity periods 

In today’s inflationary economy, buyers request extended exclusivity periods to give themselves enough time to study a company. One main area of their concern is a company’s pricing arrangements with its contracting parties and the ability of those parties to change the agreement terms. For example, they may want to know whether a supplier’s pricing is fixed or guided by market rates. 

Alternative Payments 

Today, more and more buyers are proposing alternative payment methods instead of one-time cash payments when closing deals. For example, some buyers require a portion of the payment to be made once the company has reached certain financial milestones. The payments aren’t made if the company doesn’t reach these milestones.  

How Interest Affects M&A 

Between January 2022 and July 2022, the US Federal Reserve raised the interest rates by 150 basis points. Additional interest rate bumps are expected for the remaining half of the year due to the rising inflation.  

With rising interest rates comes the need to reprice assets as the changing rates dampen their values. However, many sellers delay adjusting their value expectations to conform to the new normal. As a result, they cannot agree with the buyers on appropriate pricing for companies. This inhibits deal activity.  

The Rise of Mixed Offerings 

To minimize the risks brought by rising interest rates, some buyers and sellers have utilized mixed cash and stock deals, particularly for more significant transactions. These mixed transactions benefit both the buyer and seller.  

For buyers, there is the option to offer more stock when one doesn’t have enough cash or is looking to reserve some money for future use. Also, a buyer doesn’t have to take additional debt if they don’t have the total cash amount. On the downside, the buyer doesn’t assume full ownership after making mixed payments. 

For sellers, one benefit of mixed payment is they get to hold some stock offering, meaning they will still be able to share in the rewards if the company expands. However, this means they will also share in the risks.  

Since mixed payments provide benefits and risks to buyers and sellers, they should be structured to protect both parties. An analysis of the Q3 and Q4 2022 M&A market shows that diverse offerings will continue to grow in popularity, while stock portions will become larger as interest rates rise.  

The Impact of Economic Uncertainty on M&A 

Lately, there has been much uncertainty about whether the US is in a recession. President Joe Biden asserts strongly the country isn’t there yet, citing rising wages and a thriving labor market. Besides, the National Bureau of Economic Research, responsible for making the official declaration, hasn’t declared a recession yet. However, many people feel that a recession is inevitable, given the country’s economic standing and rising inflation.  

The growing uncertainty has had significant impacts on M&A. In the US, M&A activity dropped by 40% in the second quarter of 2022. That’s because most companies are more focused on the effects of the recession on their businesses, so they are less interested in M&A.  

Moreover, the uncertainty has reduced consumers’ purchasing power, with most people allocating their funds to basic needs, such as food, gasoline, and electricity. Other sectors are left struggling to maintain sales and profits. Most sellers don’t like to sell their businesses when sales and profits are low, so they’ll wait for the cloud of recession to pass before testing M&A markets. 

Which Industries Are Thriving?  

The technology sector continues to dominate global transactions, with technology, media, and telecommunications (TMT) M&A having the highest deal volume. And while the deal volume in the first half of 2022 has reduced compared to the same period in 2021, the deal value has increased due to the high number of megadeals. According to PWC, the deal value for the first quarter of 2022 was $173.3 billion, while the second quarter was $99.1 billion. This is a combined $272.4 billion in the first half of 2022 compared to $172.8 billion in 2021.  

What People Are Saying 

In light of the current M&A trends, dealmakers are sending clear signals that mergers, acquisitions, and divestitures will provide critical levers for businesses that want to navigate the evolving economic development. In ” The Future of M&A 2022 M&A Trends Survey,” a study conducted by Deloitte, 1300 executives at private equity investor (PEI) firms and corporations gave their insights on the current deal and activity and what they expect in the next twelve months. The findings revealed: 

  • 32% of the executives are considering a divestiture 
  • 52% of executives have been involved in a divestiture in the last year 
  • 92% of executives expect deal volume to remain the same or rise over the next year 

Elevate M&A Activity With Devensoft 

The economic headwinds experienced in the first half of 2022 will likely continue throughout the year. Despite these conditions, M&A activity doesn’t stop, and dealmakers are still as active as ever. However, dealmakers cannot afford to use the same strategies they used in the pre-pandemic era. They should reset their strategy with an uncertain economy in mind.  

If you want to elevate your entire M&A process and complete deals more successfully, Devensoft has an M&A software platform to make that possible. Contact us today to learn how we can help you.  

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