The total deal value of closed mergers and acquisitions worldwide declined 36% year over year during 2022, according to S&P Global. This marked a rapid retreat from the record high M&A levels experienced during 2021, when total deal values exceeded $1 trillion each quarter.
“Central banks have looked to tame inflation by raising interest rates, which has helped push equity valuations down and raise the cost of acquisition financing,” according to Joe Mantone of S&P Global. “As a result, the total value of M&A announcements has dropped considerably."
To address rising interest rates, many companies have relied on their cash reserves from government pandemic stimulus programs to temporarily absorb increased debt cost. But as they use these reserves, more business owners are likely to enter the market, some as distressed company sales.
While deal-making has declined, sellers may be encouraged by the fact that private equity firms continue to sit on near record high levels of dry powder. Moreover, if we approach a recession accompanied by a continued decline in equity values, private equity investors are likely to put their capital to work again in an accelerated fashion acquiring well priced companies.