Businesses around the world continue to be on edge that a recession, even a mild one, could still occur in the second half of 2023. And it shows.
The latest data shows that global merger and acquisitions (M&A) deals have dropped drastically in the first half of 2023. There have been 25,631 deals in the first half of 2023, according to data from a PwC report. This is down from 29,725 deals at the same time last year, a decrease of 13.77%. It's an even more drastic decrease of 24% from the peaks of 2021 when there were 33,667 deals made.
Yet perhaps the most concerning number is the total volume of M&A deals, but the value. Global M&As hit $1.17 trillion at the time of this report, down from $1.965 trillion at the same time last year, and an incredible $2.68 trillion in 2021. What's more, these are the lowest numbers seen since 2020 during the pandemic. Taking out the pandemic, it's the lightest first half seen in a decade.
Why it matters
The first half of the year is historically a time when companies get to use the influx of cash from the winter season to put it to good use. This use comes through major M&A activity. What's more, the second quarter of the year should also be more active than the first, but again, numbers show that this was the slowest quarter since the pandemic.
It just shows that businesses remain concerned about rising interest rates, with the Federal Reserve continuing to plan more rate hikes until inflation gets under control. For now, May rates came in at 5.2%, with inflation hitting 4%. At first, there were thoughts that Americans could see another increase in July, sending businesses into protection mode over their cash flow. However, recent data has shown that inflation might be going in the right direction, leading to the potential of the Fed being less anxious to raise interest rates.
Interest rates will stabilize eventually, at which point businesses will likely feel more comfortable making deals once more. And there could be an incredible boost of M&A activity, especially if/when inflation can get back down to 2%.
There was also the recent positive news that the 23 banks in the United States passed the Bank Stress Test. This could pave the way for more dividend increases and share buybacks from banks as well. Such news shows that despite all this volatility and lower M&A activity, the United States remains in a strong economic position.
So, is a recession coming?
In short, M&A activity cannot predict whether a recession will eventually come to Americans or not. Businesses are merely preparing, with immense volatility coming down during the first half of the year. This included the closure of several banks, leaving companies uncertain about the future.
For now, companies have focused on strong balance sheets, wanting lower debt levels during this uncertain time. However, as the market stabilizes, this could lead to an increase in M&A activity in the next year or so, if not during the second half of 2023. This could occur as interest rates come down in the United States and elsewhere.
But as to whether M&A activity can influence a recession, the answer is no. While M&As can certainly lead to increased investment and job creation, there can also be short-term disruptions from restructuring. So it really does come down to the specific deal and the specific companies involved with the M&A. Not the economy itself.
What investors should watch for in 2023
Recession or not, M&As can certainly be one of the factors influencing the decision by investors to invest in a company in the first place. According to Morgan Stanley (MS), after a slow start to 2023, deals should accelerate as companies look to make deals that strengthen their overall business.
In their 2023 M&A Outlook, Morgan Stanley stated there should be a resurgence in activity in the next 6 months. This would include well-capitalized companies that would be making acquisitions to strengthen their core business. Private equity firms are also sitting on a record amount of capital, and are likely to start using it to make acquisitions as well. Shareholders may also start to get impatient with businesses, urging companies to make some moves to bring in more growth through acquisitions. Furthermore, Morgan Stanley also predicted a rise in cross-border M&As.
This could start even with interest rates remaining around 5%. While it's true that companies will have higher interest rates to work with when making many of these deals, taking on debt to make acquisitions, companies with immense cash may not be as worried. There will be less debt to take on in the first place, leading many of these to take on higher interest rates and seize the opportunities available right now. We may even start seeing more “mega-deals" of $10-billion or more, which have also remained down in 2023.
All in all, economists across the board are bullish on M&A activity in the rest of 2023. As interest rates stabilize, there should certainly be an increase in M&A activity. However, with companies continuing to hold strong balance sheets and plenty of cash on hand, even higher interest rates likely won't stop companies from seizing opportunities to grow their businesses as they arise.
On the date of publication, Amy Legate-Wolfe did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
