Global M&A poised for growth as storm clouds recede
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Insights
The recent downturn in mergers and acquisitions (M&A) activity reflects a broader trend of cautiousness among corporations, attributable to a confluence of economic pressures. The notable 27% decline in global deal volume and the 30% reduction in large deals over the past year are indicative of a strategic shift towards risk aversion, likely spurred by the current macroeconomic environment characterized by inflation, rising interest rates and geopolitical instability.
Historically, M&A activities can serve as a barometer for economic confidence, as they often require substantial capital investment and a positive outlook on future market conditions. The underperformance of companies engaging in M&A, particularly in North America and Europe, suggests that the market is currently punishing perceived overvaluations or mismatches in synergistic potential. This trend is further accentuated by the steep underperformance of -13.6 percentage points in Q4 2023, which may signal an overestimation of deal benefits or integration challenges post-merger.
The Asia Pacific region's outperformance could be attributed to region-specific factors or a more favorable alignment of acquisitions with strategic goals. However, the overall decrease in M&A volumes across all regions implies a need for prudent capital allocation and rigorous due diligence when pursuing potential deals.
From a financial perspective, the underperformance of acquirers in the M&A space, particularly with a record low since 2008, raises concerns about the valuation models and cost of capital calculations used during these transactions. The data suggests that acquirers may have faced challenges in justifying the premiums paid for acquisitions, especially in a market environment where interest rates are rising and capital is more expensive.
Investors should be aware that the underperformance of M&A deals can have a direct impact on stock prices and market valuation of the companies involved. The -7.2 percentage point underperformance for the full year of 2023 compared to the marginally negative -0.8 percentage points in 2022 indicates a significant shift in market reception towards these deals.
The decline in mega deals also suggests a potential recalibration of market expectations, as companies may be avoiding the complexities and heightened scrutiny that come with larger transactions. The projection of a rebound in M&A activity for 2024, fueled by dry powder (unallocated capital), should be approached with caution, as the success of future deals will likely depend on the careful selection of targets and the ability to integrate them effectively.
Examining the M&A landscape from an economic standpoint, the data reflects a contraction in economic activity in terms of corporate expansions via acquisitions. The decline in M&A deals is consistent with the economic theory that increased uncertainty, whether from inflationary pressures or geopolitical tensions, leads to a reduced appetite for risk and investment. The performance differential between acquirers and non-acquirers could be seen as a reflection of the market's valuation of the risk associated with these deals.
Furthermore, the trend towards smaller, mid-market transactions indicates a strategic pivot towards deals that are not only easier to execute but also less exposed to the volatility of the broader market. This shift may be a rational response to the current economic climate, where the cost-benefit analysis of M&A activities is increasingly scrutinized.
The expectation for joint ventures and strategic alliances to increase in 2024 is consistent with the idea of risk-sharing in uncertain times. Companies are likely to pursue these alternative forms of collaboration to maintain strategic flexibility and resilience against ongoing market disruptions.
North America acquirers closed 317 deals in 2023
ARLINGTON, Va., Jan. 10, 2024 (GLOBE NEWSWIRE) -- Global mergers and acquisitions (M&A) activity lost steam in the final three months of 2023, with buyers struggling to add value, according to new research on completed deals from leading global advisory, broking and solutions company WTW’s Quarterly Deal Performance Monitor (QDPM).
Based on share price performance, companies completing M&A deals in the fourth quarter of 2023 underperformed the wider market by –13.6 percentage points for acquisitions valued over
Run in partnership with the M&A Research Centre at Bayes Business School, the full-year figures for 2023 reveal an underperformance by buyers of –7.2 percentage points compared with non-acquirers. This compares with the marginally negative full-year performance of –0.8 percentage points recorded in 2022. Despite these latest results, the long-term 15-plus-year trend shows deals have outperformed the market since the global financial crisis of 2007 – 2009 (+1.5 percentage points).
Global deal volume was down by
“It has been a tough 12 months. M&A deals have been weighed down by geopolitical conflict, recession fears, rising interest rates and the high cost of capital,” said David Dean, managing director, Mergers and Acquisitions, WTW. “Potential for disruption in 2024 remains considerable, exacerbated by a packed election calendar and a complex regulatory landscape raising more hurdles, scrutiny and longer timetables to complete deals.
“Despite these headwinds, inflation and the cost of financing seem to be stabilizing, and the record level of dry powder waiting to be deployed suggests a rebound of activity in 2024. With transactions facing greater scrutiny, however, successful bids will depend more than ever on exercising a high degree of caution, a focus on ‘best-fit’ deals and thorough due diligence.”
Global M&A deals — annual performance
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
| Average annual performance (percentage point)* | +4.5 | +5.5 | +10.1 | +5.4 | –1.3 | –3.0 | –5.0 | –1.9 | +1.4 | –0.8 | –7.2 |
*The figures in the table show the annual median-adjusted performance of all acquirers.
North America acquirers closed 317 deals in 2023,
Asia Pacific was the only region to outperform its regional index (+6.4 percentage points), with 155 deals completed in 2023. As with other regions, however, Asia Pacific volumes were down
Dean noted, “Macroeconomic volatility and geopolitical conflict will ensure conditions continue to test dealmakers over the next 12 months, driving the current trend of targeting smaller mid-market transactions that are easier to execute, are less risky to finance, and offer a unique and strategic fit within an acquirer’s portfolio.
“We also expect joint ventures, strategic alliances and minority investments to gather pace in 2024 as companies respond to market disruption by sharing and mitigating risk in pursuit of strategic deals, with a renewed focus on technology not only as a source of growth but also to unlock greater value from M&A.”
WTW QDPM methodology
- All analysis is conducted from the perspective of the acquirer.
- Share-price performance within the quarterly study is measured as a percentage change in share price from six months prior to the announcement date to the end of the quarter.
- All deals where the acquirer owned less than
50% of the shares of the target after the acquisition were removed; hence, no minority purchases have been considered. All deals where the acquirer held more than50% of target shares prior to the acquisition have been removed; hence, no remaining purchases have been considered. - Only completed M&A deals with a value of at least
$100 million that meet the study criteria are included in this research. - Deal data are sourced from Refinitiv.
About WTW M&A
WTW’s M&A practice combines our expertise in risk and human capital to offer a full range of M&A services and solutions covering all stages of the M&A process. We have particular expertise in the areas of planning, due diligence, risk transfer and post-transaction integration, areas that define the success of any transaction.
About WTW
At WTW (NASDAQ: WTW), we provide data-driven, insight-led solutions in the areas of people, risk and capital. Leveraging the global view and local expertise of our colleagues serving 140 countries and markets, we help organizations sharpen their strategy, enhance organizational resilience, motivate their workforce and maximize performance.
Working shoulder to shoulder with our clients, we uncover opportunities for sustainable success—and provide perspective that moves you. Learn more at wtwco.com.
Media Contacts
Ileana Feoli: +1 212 309 5504
ileana.feoli@wtwco.com
1 The M&A research tracks the number of completed deals over
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