The total deal value of closed mergers and acquisitions worldwide declined 36% year over year during 2022, according to S&P Global. During 2021, total deal values exceeded $1 trillion each quarter, marking a record high in M&A levels. However, there has been a rapid retreat from these levels.
“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."
Many companies have addressed rising interest rates by relying on their cash reserves. These reserves, obtained from government pandemic stimulus programs, serve to temporarily absorb the increased debt cost. But as they use these reserves, more business owners are likely to enter the market, some as distressed company sales.
Deal-making has experienced a decline. However, sellers might find encouragement in the fact that private equity firms continue to sit on near-record-high levels of dry powder. This situation suggests that there is substantial available capital for investments. The surplus of dry powder could potentially drive future acquisition activities. 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. This would happen in an accelerated fashion, with a focus on acquiring well-priced companies.
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