Will CEO’s strong appetite for M&A continue?

After skyrocketing past the $10 trillion-mark last year, the global M&A market has slowed in 2022. In the first three quarters of the year, $5.4 trillion worth of global deals were reported, down from $7.8 trillion over the same period in 2021. Deal volume through to Q3 2022 declined 16 percent compared to the same period last year.

This cooling in the market may see the end of the 24-month streak of $1 trillion quarters in Q4 2022. Even so, there is good reason for optimism: annual deal activity remains on track to exceed every year prior to 2021. With much deal activity focused on digitizing and transforming organizations, we expect to see this strong activity to continue into next year.

Some sectors are cooling at a slower rate than others, including healthcare, renewable energy and technology. Technology, for example, remains a hot target sector with top investors coming from the business services, consumer and retail, financial services, and industrial manufacturing sectors. As such, while technology deal value declined by 8 percent so far this year compared to the same period in 2021, it has already exceeded the total deal value in every year prior.

This continued interest in acquiring technology-based companies signals the ongoing efforts companies are taking to digitize and automate their operations. CEOs are also exploring other ways deals can help their companies stay competitive as they anticipate economic challenges ahead.

We see this in the continued strength of cross-border deals, which has already surpassed $1.5 trillion in value in 2022. While a 13 percent decline over the first 3 quarters of 2021, cross-border deals are expected to exceed pre-2021 values and volumes. A result of companies looking to diversify and localize their supply chains, realign their operations and workforces, and adapt to geopolitical and economic impacts.

The dynamics of the past two years have accelerated the expansion of the direct-to-consumer evolution. Technology is key to this transformation. As a result, consumer and retail deals with technology-based companies skyrocketed to 829 deals between Q1 and Q3 2022, a 236 percent jump in volume over the full previous year. This represents more than one-quarter of all cross-sector deals reported so far in 2022, and it is almost double the average annual deal volume reported between 2015 and 2021 (428 deals per year).

Not only are businesses keen to prepare their companies for what comes next, they are poised to transact should the right deal come their way. Businesses have never been more cash flush and global private equity dry powder is in abundance.

The US dollar is also strong. So far this year, almost 70 percent of US deals have transacted domestically; however, the high appetites among US CEOs for dealmaking could take them to Europe and elsewhere in the future. Adding further buoyancy to the deal market is the strong corporate growth across all regions except for Europe.

According to the KPMG Financial Performance Index (FPI), a proprietary tool that analyzes financial data from 40,000 listed companies across the world's 50 largest stock exchanges, year-over-year performance is down, however, overall corporate financial performance in Q3 2022 improved to 90.7 (out of a score of 100), compared to 90.3 in the previous quarter. This positive movement aligns with the report's longer-term prospect that the economy is showing signs of long-term growth.

Sustainability has become a defining trend affecting businesses worldwide. This is particularly true in Europe where the EU's Green Deal and other regulatory initiatives are pushing environmental, social and governance (ESG) criteria to the top of the corporate strategy agenda. KPMG's recent survey of dealmakers in Europe, the Middle East and Africa found that four out of five dealmakers are now considering ESG as part of their M&A agenda. While there is little consensus around what ESG due diligence, the data indicates this is a key priority for investors. As such, two-thirds of respondents would be willing to pay a premium to targets with high levels of ESG maturity.

While the imperative to transform at deal speed remains, investors will be tested with higher interest rates and borrowing costs. As a result, deal makers will need to take a sharper pencil to the numbers and look for ways to unlock deal value at every step of the way.

Unlocking value will be more challenging under current conditions, which requires a more proactive - and aggressive - approach as highlighted from Delivering on the promise of value creation (PPDF 3.49 MB):

• Start as early as possible looking at current or potential deals or transformations through a value creation or business model-shift lens. Research is showing that only 35 percent are planning for value from the very beginning.
• Advanced data and analytics is indispensable in finding value creation opportunities and creating effective strategies to deliver the value.
• Adopt a balanced approach that looks at the triple bottom line: profit, people and planet. With the current economic outlook, it would be understandable to focus solely on cost. However, with the right strategies and data in place, one can take a longer-term approach and ensure any deal or transformation produces a lean business fit for the future.

Learning from the challenges of the last few years, companies are looking ahead with more confidence in their company's resiliency. They are also redrawing the lines for dealmaking, putting greater focus on opportunities that will transform their businesses and create long-term value so their organizations are ready to weather any future storms with agility.