The level of economic uncertainty has spiked globally in numerous industries amid the war in Ukraine. The business implications of Russian aggression and the imposed sanctions have included growing energy prices, shortages in grains and the lack of raw materials, among other consequences. But can we assess the way in which this situation has affected the mergers and acquisitions market as we enter the second half of 2022? And are there any other major factors that affect it?
The challenges posed by the post-pandemic reality were only partially predictable. The economic slowdown forecasted before the Covid-19 threat, somewhat “postponed”, has not disappeared, and according to analyzes, in 2022 global GDP may already amount to 2.6% (a decrease from 5.1% in 2021 according to the World Bank) and 2.2% in 2023. Inflation is also a major issue. In May this year, Turkiye was hit the most in an annual perspective (73.5%), and in the two-years perspective – Israel (a 25-fold increase seen, from 0.13% to 3.36%).
The key event that was impossible to take into account, however, was the Russian attack and the scope of the sanctions levied by the world governments, which contributed to the lack of availability of fossil fuels and imported raw deposits, as well as the disruption of some supply chains, especially in the CEE region.
To what extent have these factors affected the condition of the M&A industry this year?
Factors influencing the M&A market in 2022
Reports point to the record-breaking year of 2021 in the mergers and acquisitions sector. After a temporary slowdown caused by sanitary restrictions, the transaction volume increased to over 62,000 deals conducted worldwide and exceeded the value of $ 5 trillion for the first time in history. The past year was record-breaking for the M&A industry in many countries.
The situation of companies facing the post-pandemic, inflationary and war-related repercussions forces entrepreneurs to reorganize. Still, as a result of government interventions, experts did not observe a spill of distressed assets transactions neither last nor this year. The second half of 2022 may, however, show a stronger tendency to sell off. Analyzes are currently moderately positive but indicate a decline in the activity of the M&A sector (in global terms) in the first quarter of ’22. This is influenced, in addition to the above-mentioned macro factors, by:
- More restrictive regulatory environment
- The challenge of appropriate valuation and prediction of the proceedings duration
- Problem with choosing an investment target and a proper risk estimation
The tightening regulatory environment in M&A
In the face of global threats, regulators in individual countries have adopted a conservative attitude and are looking more closely at international transactions in order to protect national interests. In practice, this may mean an extension of the due diligence period.
From January 2022, acquisitions in the UK must be assessed under the National Security and Investment Act (NSIA), a document under which the Secretary of State at the Department for Business, Energy and Industrial Strategy may impose conditions, block or unwind processes, if in their opinion the deal poses a threat to national security. Similarly, European Union countries have decided to extend the control of FDI investments in order to limit the impact on European business of Russian and Belarusian entities, including those not directly covered by sanctions. On April 6, 2022, the European Commission issued a Communication in which it included guidelines on the assessment of foreign direct transactions from Russia and Belarus.
Selection, valuation and risk of M&A transactions in 2022
Despite potential red flags, the outlook for mergers and acquisitions in the near term is moderately positive. In the first quarter, the decline in global transactions was approximately 20% compared to the first quarter of 2021. Still, the M&A market is highly resilient. The appetite for acquisitions is not diminishing and there is no shortage of funds reserved for investments and lending – although banks look more closely now at the financial condition of companies and their business environment, resources, supply chains, business continuity and detailed links on the international market.
Companies intending to make acquisitions in 2022 must look more closely at the goals from the side of their multiple connections with Russian capital. The problem concerns the ultimate ownership of a target company and the impact which Russian capital may have on its activities in the longer term. On the other hand, investors should also consider the target’s resistance to cyberthreats. The experience gained during a pandemic will be useful in careful investing.
The growing importance of the ESG dimension will also be an increasingly important factor motivating acquisitions. Consumers and companies themselves will therefore more often take a firm stance on the impact that business expansion may have on society and the environment in the emerging new economic system on a global scale.
For these reasons, the due diligence process may be extended – depending on the type of investment – due to the need for a more scrupulous analysis of each of the parties to the process in terms of their compliance with the new economic guidelines and precautionary recommendations. The process may also need to be revised in line with the ongoing changes in international policy.
The network of interdependencies on the international market has become significantly complicated since the first quarter, which had an impact on company valuations. Investors are currently in a better negotiating position due to, inter alia, higher risk and the possibility of target companies finding themselves in a worse financial position in the short and medium term. Therefore, more investment opportunities may soon emerge.
Did you like the article?
How many heads, so many ideas. That's why each of us contributes to making the content on our blog attractive and valuable for you. Discover a source of knowledge and inspiration for your business with Fordata.
Do you want to exchange knowledge or ask a question?
Write to me : #FORDATAteam page opens in new window
01 . The Shifting Landscape of Gaming M&A: A Tale of Investments, Acquisitions, and Emerging Trends
The trajectory of the gaming industry’s investment landscape has been anything but predictable. Q1 2023, marked by a cooling-off period from the frenetic growth during the Covid-boom, saw investments dip significantly.
02 . M&A Landscape in the Middle East: Navigating Challenges and Seizing Opportunities
The Middle East has long been recognized as a dynamic and transformative region, and its M&A sector is no exception.
03 . Energy industry 2023: Virtual Data Room in M&A transactions
The situation in the energy industry in Poland and Central and Eastern Europe is rapidly changing. What do investments in renewable energy look like?
04 . Outlook for 2023 for M&A transactions in Scandinavia
The Nordic countries are considered stable and developed markets with strong economies. What key trends will drive the Nordic M&A market?
05 . What do M&A deals look like in 2022?
What does influence M&A deals in 2022 besides the war? We analyze the factors that shape the global mergers and acquisitions market.
06 . The role of the CFO in mergers and acquisitions - has it changed?
Financial directors have faced the big challenge of managing company’s funds in the uncertain reality caused by the coronavirus …
07 . The post-pandemic outlook on M&A in the Baltic States
Like the entire M&A market, in the first half of 2020, the Baltic region was marked by lockdowns, which had a number of…
08 . What are the benefits of the FORDATA system in M&A processes?
Global opportunities for mergers and acquisitions are expected to remain firm after the initial lockdown, as pointed out by PwC, but the new and the ongoing transactions will have to adapt to the new circumstances.
09 . The post-pandemic outlook on M&A in Czech Republic and Poland
Coronavirus did stir up trouble for practically entire economies in Czech Republic and Poland. In general, companies…
10 . M&A in the age of coronavirus - market at a turning point
The situation on the Polish mergers and acquisitions market today resembles a controlled lottery. Some investors and entities are withdrawing or suspending operations waiting for stabilization
11 . CEE countries stay firm as global economy bears down
In the face of economic downturn all around, also in Europe, countries in the CEE region are expected to keep growing, especially…
12 . Due Diligence stages - selling your business step by step
Every good investment decision is based on sound knowledge about a given company and transaction process. This applies…
13 . Due Diligence - what exactly does it include?
What does Due Diligence investigation consist of? Who performs it? What are its types? Find the answers to these and other questions on FORDATA blog!
14 . Vendor Due Diligence - the Value of Negotiation Preparation
Vendor Due Diligence (VDD) is carried out only for the needs of the seller, which means that it takes place earlier than Due Diligence (DD).
15 . How can we help you with Due Diligence?
Time plays a major role in M&A transactions. Even the smallest improvement that saves time needed to prepare and perform Due Diligence…
16 . VDR in due diligence process
M&As are a permanent element of the economic world. Their goal is to achieve strategic and financial benefits by expanding markets, diversifying products and production processes.