M&A Highlights First Half 2022: Down at halftime

Data InsightDealspeak 6 July

M&A Highlights First Half 2022: Down at halftime

Powered by Dealogic data, M&A Highlights reviews M&A activity across North America, EMEA and APAC in 2022 to date. All data correct as at 1st of July 2022

Downslide: Global M&A bottoms out in 1H22

Global dealmaking dropped by nearly a quarter during the first six months of 2022 as the world’s major economies raised interest rates to tame runaway inflation, grappled with conflict in Ukraine, and stock markets turned bearish. The value of mergers and acquisitions fell 23% to USD 2.2tn in 1H22 compared with the same period last year. By number of transactions, activity dropped 20% to 15,764 deals over the same period.

Global M&A totaled USD 1.2tn in 2Q22, up 5.5% on 1Q22’s USD 1.1tn, suggesting a bottoming out between the first and second quarters. However, the number of deals dropped 17.5% sequentially to 7,122 in 2Q22, the lowest quarterly haul in 18 years as dealmakers fretted about the increasing prospect of a recession. 

North America – down by a third from last year’s record first half – still accounted for nearly half of worldwide M&A value. Dealmaking there continued to slide between the first and second quarters along with the stock markets.

Europe saw a rebound in the second quarter, with M&A value rising 24% sequentially. M&A had already dropped more in Europe than in other regions earlier this year following Ukraine’s invasion in February.

In Asia Pacific, the picture was mixed. M&A dropped by 36% in North Asia between the first and second quarters as the rolling Covid lockdowns in Beijing and Shanghai disrupted supply chains and made investors nervous. By contrast, Australasia’s dealmaking grew 2.5 times sequentially thanks to Ramsay Health Care’s USD 21bn sale in April, while India’s M&A almost quadrupled between the first two quarters in large part because of a mega deal in banking.

The attraction of real estate in a risk-off world 

The top five sectors globally were technology (28% of all value), real estate (10%), finance (9%), transport (8%) and healthcare (7.6%). North America accounted for more than 70% of all tech deals by value. The risk-off sentiment in North America led to the US taking a lower share of the top 10 deals than previously, with four US companies making the cut.

Still, the top two deals were American: Activision Blizzard’s USD 75bn sale to Microsoft in January and VMware’s sale to Broadcom for                   USD 71.6bn, including debt, in May. The third largest deal involved the sale of India’s largest mortgage lender, Housing Development Finance Corp, to India’s most valuable bank, HDFC Bank, for USD 60.8bn. The deal follows the banking regulator’s proposal for large finance companies to convert into banks to avoid a repeat of 2018’s shadow lending crisis.

Italy-based toll road and airport operator Atlantia sold to Blackstone for USD 46.4bn in April to place fourth, highlighting private equity’s increasing interest in infrastructure and real estate assets. Two other top 10 deals involved warehouse-focused real estate investment trusts (REITs): Duke Realty’s USD 27.4bn sale to Prologis and Mileways USD 24bn sale to Blackstone.

Opportunity knocks

The question now is whether the second half will bring further declines or a rebound in activity. In Europe, M&A activity is likely to feature companies like Unilever, which is reportedly under activist pressure to sell its ice cream business, as well as French IT giant Atos, which is looking to split itself into two. In Asia Pacific, China should be poised for a rebound and India could see more activity in its banking sector.

In the US, with the stock indices in bear market territory, bargain hunters will have the chance to buy at a discount, especially in the battered technology sector. Zendesk’s USD 10bn sale to private equity in late June, months after the software company had rejected a USD 17bn offer, is a highlight of yet more to come. 

Financial Sponsor activity shows strong resistance amid global M&A slowdown

Amid a global slowdown in M&A in the first half of the year, sponsor buyout activity has shown strong resistance in the face of mounting inflation, rising interest rates and high valuations as investors continue to deploy their substantial amount of dry power.

Global sponsor activity generated USD 435.7bn in value across 1,154 deals in the first half of the year, a 13.1% decrease in value from the H1 period last year. The second quarter of 2022 alone registered USD 236.9bn across 531 buyouts with several USD 10bn+ deals, including Blackstone’s USD 46.4bn majority acquisition of Atlantia, the USD 21bn takeover of Ramsay Health Care by KKR and the USD 10.3bn take private of Zendesk by Hellman & Friedman and Permira consortia. The overall value of the buyout deals for Q2 took 20.6% share of the worldwide M&A, the largest quarterly figure on Dealogic record since 2007.

Exits hampered by economic turbulence 

The global sponsor exit activity remains short of 2021 figures. So far this year, 536 deals were inked worth USD 326.6bn, down 27% in value compared to H1 2021. With public market exit routes down, the trade sale option has been the most preferable route. Only 2 IPO exits have been registered year-to-date.

Technology remains the most attractive space for investors, with 336 transactions worth USD 111.5bn signed so far this year. Transportation recorded the second highest deal value in the first six months, collecting USD 64.7bn across 38 deals, mainly driven by Blackstone’s mega-buyout of Atlantia, the USD 20bn acquisition of Autostrade per l'Italia by consortium of Blackstone, Macquarie group and Cassa Depositi e Prestiti as well as KKR’s USD 6bn acquisition of Japanese logistic service provider Hitachi Transport System.

North America: Dealmaking continues to drop

North American M&A continued its downward slide in the second quarter as the Federal Reserve’s rate hikes to curb inflation and the rising prospect of recession kept dealmakers on the sidelines.

A total of 2,098 transactions worth USD 500.6bn were inked in 2Q22, down 36% by volume and 32% by value since activity peaked in the same period a year ago. In every quarter since that record-breaking 2Q21, M&A has shrunk sequentially by an average of 11%.

For the first six months of 2022, North American M&A totaled USD 1.048tn, a 33% drop on last year’s record first half.

Nonetheless, the region still contributed 47% of global M&A by value and is responsible for the world’s priciest deals. Broadcom’s [NASDAQ:AVGO] acquisition of virtualization software developer VMWare [NYSE:VMW] for USD 71.6bn, including debt, was the world’s biggest deal of 2Q22 and the second largest of 2022. Microsoft’s [NYSE:MSFT] USD 75bn deal for video games publisher Activision Blizzard [NASDAQ:ATVI] in January is still the year’s No. 1 deal.

Tech first

Technology deals contributed USD 237bn or 47% of all North American M&A, buoyed by the Activision Blizzard and VMware deals as well as Elon Musk's USD 41bn offer for Twitter [NYSE:TWTR].

 Real estate was the second most active sector for the third successive quarter, accounting for USD 53.3bn or 11% of the region’s M&A in 2Q22. The top three deals involved the USD 27.4bn acquisition of Duke Reality REIT by ProLogis; the USD 13bn acquisition of American Campus Communities by Blackstone; and the USD 11bn acquisition of Healthcare Trust of America by Healthcare Realty Trust.

Healthcare took third spot with deals worth USD 49.9bn, down by two-thirds from a year earlier but up 15% sequentially on the previous quarter. Pfizer’s [NYSE:PFE] USD 11.5bn deal for Biohaven Pharmaceutical was the biggest transaction.

LBO dip

The Fed’s higher-than-expected rate hikes combined with continuing uncertainty in the markets have left private equity firms extra cautious. Leveraged buyout activity dropped 53% to USD 50bn in 2Q22 compared with the same quarter a year ago. Sequentially, there was a 48% drop in value.

The fall in stock market prices - the S&P 500 is down by nearly 22% and the NASDAQ by 31% - is creating an opportunity for financial sponsors to buy assets at a discount.

That is what happened in late June when Zendesk [NYSE:ZEN] sold to a group led by Hellman & Friedman and Permira for USD 10.2bn, four months after the software firm had rejected a USD 17bn offer.

The road ahead

Several more assets could hit the market at a discount.

In May, Vice Media reportedly hired a bank to sell, likely for a fraction of the USD 6bn it was once worth. Other big software companies that could draw interest include Dropbox, which was reportedly approached by a buyer in May.

In the oil and gas space, Quantum Energy hired a bank to sell USD 5bn-valued THQ Appalachian I; Sabinal Energy is readying for a USD 1.5bn sale, and Aethon Energy is weighing a USD 10bn IPO. In infrastructure, Albertis is reportedly analyzing the purchase of a majority in the USD 4bn Chicago Skyway toll road concession.

Other multi-billion-dollar transactions expected in other sectors include Gaylord Chemical, defense company BlueHalo, Champion Pet Foods, Grubhub, and data center/cloud service providers Rackspace.

EMEA: Inflation bites as M&A falls from historic high

EMEA M&A fell back to earth in the first six months of 2022, following a record-breaking year. Inflationary pressures and the growing threat of recession across the region, as well as geopolitical tensions have curtailed much of the free-spending by corporates seen a year ago as valuations and financing become increasingly challenging.

The region saw a total of USD 616.8bn spent across 5,493 deals. This represents a 12.7% decline versus the opening half of 2021 (USD 704.6bn), and a 28.4% fall in comparison to 2H21 (USD 858bn). It is however worth noting that 2021 represented the largest annual value on Dealogic record, and this year’s figures remain in line with pre-pandemic levels. This year’s activity was saved by a rise in the number of big-ticket deals seen during the second quarter, as the total value of transactions worth at least USD 2bn climbed to USD 194.4bn, from just USD 124.5bn in the opening three months of 2022.

The direction of travel, however, seems clear. Foreign investment for example, which accounted for just shy of 29% of the region’s value across 2021, saw a sizeable decline to 21.5% in 1H22. Inbound M&A retreated by 37.4% by value versus 1H21 (USD 204.1bn) to USD 127.9bn in the first six months of the year.

Buyouts skyrocket while financial sponsor exits flatline

The main bright spot remains sponsor-backed activity. Investments made by financial sponsors hit USD 173.3bn, equating to a staggering 28.2% of the region’s total value in the first half of 2022, up from 22% seen during 2021.

This was largely propelled by a sizeable uptick in the second quarter. The USD 114.3bn spent by sponsors in EMEA in 2Q22 represents the highest quarterly value for sponsor-backed activity in the region on Dealogic record. The steep rise in fundraising and record levels of dry-powder available has left private equity firms increasingly look towards larger, listed firms. The region’s two largest deals in 1H22 were both leveraged buyouts, with the largest – Blackstone and Edizione’s USD 46.6bn public offer for Italian transport firm Atlantia representing the largest European LBO on record.

Exits, however, have failed to keep pace. Sponsor exit activity has fallen to a combined USD 70.3bn so far this year, the lowest half-year value for such transactions since the first half of 2020. Just three exits worth at least USD 5bn have been recorded in Europe this year, including the takeovers of SAZKA Entertainment and Element Materials Technology Group, which were both announced in January. In 2Q22, the largest exit saw Cinven and Novo Holdings sell Swedish temperature-controlled cargo container company, Envirotainer, to EQT and Mubadala for EUR 5.1bn in early June.

There have also been several high-profile deals fail to come to fruition. Challenging credit markets resulted in Wallgreen Boot’s Alliance [NASDAQ:WBA] ditching its planned sale of UK pharmacy chain Boots. Meanwhile, online marketplace operator THG [LON: THG] and publisher Pearson [LON: PSON] both failed to reach agreements with interested financial sponsors.   

Tech remains front-runner 

Tech remains the most active sector in EMEA by some margin, with just shy of 30% of deals targeting tech in the opening half of this year. It also maintains its place as the most targeted sector by value, with a total of USD 89.7bn spent across 1,584 deals, representing a 14.6% value market share. Burgeoning spaces such as cybersecurity and gaming continue to drive the sector forward.

An uptick in TMT shows few signs of slowing down with several multi-billion dollar deals on the horizon. One such company on the radar is French gaming firm Ubisoft, which has reportedly seen interest from financial sponsors. A series of financial sponsors are reportedly interested in Italian software group Dedalus in a deal worth around EUR 3bn, while Astorg and Epiris are reportedly exploring a GBP 1.6bn deal for Euromoney.

As energy policy shifts in the wake of the war in Ukraine, M&A in the sector has taken a significant hit. Oil & gas M&A in EMEA fell 57.4% by value to just USD 17.2bn against the opening half of 2021 (USD 40.3bn). Meanwhile, renewables M&A in EMEA continues to climb, reaching USD 12.5bn so far this year. This represents a hike of 30.8% by value in comparison to 1H21 (USD 9.6bn) and means the sector has seen at least USD 10bn spent in EMEA in three of the last four half-year periods.

Asia Pacific: Mega deals lift M&A value in 2Q22

Two large deals drove a rebound in M&A value in Asia Pacific during the second quarter of 2022, even as the number of transactions continued to drop.

Despite the COVID-19 lockdowns in China, APAC’s M&A in 2Q22 increased 18.4% quarter-on-quarter to USD 286.7bn while deal count dropped 11.4% to 2,256 over the same period.

The first half of the year featured 4,803 transactions worth USD 528.7bn in APAC – down 10.2% in value and 22.6% in count compared to 1H21.

The region’s two largest deals of the year – the USD 60.8bn mega-merger between India’s financial firms Housing Development Finance Corporation Limited [BOM:500010] and HDFC Bank [NYSE:HDB], and the USD 21bn takeover of Australian hospital operator Ramsay Health Care by a KKR-led consortium – were both announced in 2Q22 and accounted for 31.2% of total deal value during the quarter.

China and India’s role reversal

Hobbled by its zero COVID policy and roiled by rising tensions with the US over Taiwan, China registered M&A worth USD 75bn in 2Q22, pushing the normally dominant country into second place behind India’s record quarterly haul of USD 97.3bn.

China still retained the crown of largest M&A hub in Asia in the first half the year, registering 1,327 deals worth USD 186.6bn, down 28.9% year-on-year in deal value.

The Middle Kingdom is expected to offer plenty of opportunities in 2H22 as the central government moves to prop up the economy with fiscal and monetary measures, eases lockdowns, normalizes anti-monopoly policies and relaxes its crackdown on internet platforms.

 In India, the HDFC merger may augur more banking deals. The construction and infrastructure sectors are drawing attention too. In May, Adani Group said it would buy Holcim’s [SWX:HOLN] stake in India cement businesses Ambuja Cements [BOM: 500425] – a deal worth USD 8.8bn.

Financial wizardry

The finance industry dominated APAC M&A in 1H22, jumping 3.4x year-on-year to USD 113.5bn, the highest on Dealogic record.

The USD 60.8bn HDFC/HDFC Bank merger is the biggest deal ever recorded in India and is the world’s third-largest commercial banking deal ever.

The technology sector remained the most active by deal count. Its 1,640 transactions accounted for 34.1% of all APAC deals in 1H22. The largest was a USD 4.7bn investment into China’s semiconductor company Innotron Memory by several investors including Tencent [HKG:0700] and Alibaba [NYSE:BABA; HKG:9988].

What next? 

The finance and technology sectors are expected to drive dealmaking across Asia in the second half.

One example is HSBC [LON:HSBA; NYSE:HSBC; HKG:0005], whose biggest shareholder, Ping An [SHA:601318], called for a split of its Asian and Western businesses. Insurers might also join the dealmaking. Minority shareholders in Chinese insurance company ABC Life are reportedly considering a stake sale worth USD 4bn.

Asian technology companies – such as India’s edtech Byju and China’s car tech company ECARX – may finally pull the trigger on large blank check mergers.

Unicorns, such as Geely-backed electric truck maker Farizon Auto, are also eyeing blockbuster fundraising transactions.

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