Deloitte M&A Index: Number of European transactions to fall by 20% in the first quarter of 2023
In the first quarter of 2023, macroeconomic problems such as inflation, rapid tightening of monetary policy and a less than optimistic economic outlook will lead to a significant decline in M&A activity. The index predicts 2,940 announced transactions for the first quarter of this year transactions for the first quarter of this year. In the fourth quarter of 2022, there were a total of 3,680 transactions, so the model predicts a decline of more than 20%. The total value of transactions (measured as the sum of the values of transactions carried out over the last twelve months) also decreased, from USD 809.9 billion to USD 677.4 billion.
Current market developments point to an adverse relationship between uncertainty and M&A markets. In this context, lower market activity – in terms of both value and volume – can be attributed to the current economic uncertainty, higher interest rates and a generally weaker macroeconomic environment. However, despite the sharp decline in transactions, market activity still has the potential for a rapid recovery, as the health of the banking system, strong cash balances and the continued expansion of cross-border transactions act as a counterbalance to the strong negative influences on the market.
Despite the sharp decline in transactions, market activity may be supported by the continuing high volume of financial resources and undistributed private capital funds. Private equity funds held approximately USD 1.96 trillion at the end of the year. These entities continue to seek investments in high-quality assets, such as companies that have gained a strong market position through long-term support for investments in production and technology. Rising capital costs are creating pressure to reduce valuations, which may limit market activity. However, this subsequent correction in market multiples brings new consolidation opportunities for market consolidators," explains Jan Brabec, partner in Deloitte's financial advisory department.
Among other things, local markets are also expected to continue to support cross-border transactions (particularly in the North America-Europe corridor), which form a key part of the European M&A market. In 2022, investments by North American entities accounted for transactions totalling USD 211 billion, which is approximately 27% of the total value of transactions in Europe. According to a Deloitte survey, more than 68% of American companies consider international expansion to be an essential part of further growth. These offsetting influences can significantly boost market activity and remain an essential variable for further market development.
"Macroeconomic conditions and market volatility have always been key factors determining M&A activity. In an environment characterised by high inflation, high interest rates and a slowing global economy, closing deals is more challenging due to increased uncertainty, higher financing costs and a more cautious investment climate. However, unlike the financial crisis of 2008, there is sufficient equity capital available to support both strategic and financial investors. Banks are also cautious, but they remain in good shape and are ready to finance transactions using leverage," adds Miroslav Linhart, lead partner in Deloitte's financial advisory department.
Summary of the M&A market for 2022
Uncertainty continued to prevail in global markets throughout 2022. The war in Ukraine, the threat of recession and the COVID-19 pandemic (in the form of disrupted supply chains) had a major impact. The S&P 500 index recorded its worst annual performance in 14 years in 2022, falling by almost 20%. The situation in Europe was not much different, with the STOXX index closing at 424.89 on 31 December, representing a decline of 12.4% for the year as a whole. Similarly, the mergers and acquisitions market saw a significant decline in the number of transactions, from 16,942 in 2021 to 15,249 in 2022, representing a 10% decline. The same applies to the total value of transactions, which decreased by 46.9% year-on-year.
In terms of sectors, healthcare was the only sector to record an increase in the total value of transactions in the fourth quarter of 2022, up 93%. In contrast, all other sectors recorded declines. The largest declines were in the consumer goods (-46%) and communications services (-42%) sectors.
The European mergers and acquisitions market suffered a significant decline as a result of the economic turmoil. With the exception of mature markets (France, Belgium and Sweden) and consistently more dynamic emerging markets (Slovenia, Croatia and Romania), all markets in this area saw a rapid decline in the number of transactions. Overall, the Balkans proved to be more resilient to macroeconomic pressures. The most affected regions included Luxembourg (-30.7% y/y), Spain (-35.5% y/y) and the Czech Republic (-45.5% y/y).
What is the Deloitte M&A Index
The Deloitte M&A Index is a forward-looking indicator that predicts future M&A market volumes – the number of announced transactions for the period under review – and identifies key factors influencing the conditions for closing deals in the European market (characterised as the 27 EU countries + the United Kingdom). The model compiles data from various global databases, including Capital IQ, Mergermarket, Pitchbook, Eurostat and many others, and uses a combination of statistical and algorithmic tools to provide a comprehensive overview of M&A market activity. The index consists of market indicators – specifically related to macroeconomic reality, liquidity and general market dynamics. Despite the increased volatility of recent periods – caused primarily by the exogenous effects of the COVID-19 pandemic and the war in Ukraine – the model retains its statistical and econometric significance.
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