December 9, 2023

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The 2022 M&A Report: Dealmaking Remains Active as Dark Clouds Form

The number of SPAC IPOs has remained low since dropping sharply in the second quarter of 2021. Given SPACs’ recent extreme underperformance—on average, their share prices have fallen by approximately 70% from their IPO prices—we do not expect a swift turnaround in the number of new SPAC IPOs.

The negative sentiment surrounding SPACs has also led to a decline in the number of “de-SPACs” (that is, mergers between SPACs and target private businesses), which in turn has contributed to the lower number of large mergers in 2022. The two largest SPAC mergers that have occurred since September 2021 were the combinations of Lionheart Acquisition Corporation II with MSP Recovery (valued at $32.5 billion) and of Gores Guggenheim with Polestar Performance (valued at $20.0 billion).

Looking Through Dark Clouds for Rays of Value

Macroeconomic conditions over the next year will likely test the resilience of the M&A market. The persistent drumbeat of bad economic news—related to geopolitical tensions, supply chain disruptions, inflation, and rising interest rates—naturally dampens enthusiasm for dealmaking. Corporate decision makers are taking a more cautious approach to acquisitions and other investments, fearing that revenues will not keep up with rising costs, particularly given the ominous threat of a recession. Furthermore, higher interest rates make deal financing more expensive. And corporate cash holdings have started to shrink, constraining the funds available for acquisitions.

Declining valuation levels, especially for technology companies, have created a gap between sellers’ and buyers’ expectations for deal prices. Although buyers focus on higher financing costs and lower valuations, many sellers continue to base their price expectations on the higher valuation levels of previous years. Historical experience suggests that sellers will need several months to realign their expectations in response to the new reality.

Even in the current environment, however, we see tailwinds and longer-term trends that are conducive to deal activity. For example, because the weakening economy leads companies to focus on balance sheets and the corporate portfolio, executives and board members may seek to sell assets or prepare assets for divestiture via corporate carve-outs. In addition, activist investors continue to pursue agendas that often lead to deals.

Some sectors, such as airlines and tourism, are still experiencing a post-pandemic rebound that could propel M&A activity. Companies emerging from pandemic disruptions in a stronger competitive position may seek to acquire weaker companies or perhaps even engage in large transformational deals that shape the sector’s future. For example, JetBlue Airways outbid Frontier Airlines to acquire Spirit Airlines. If the deal clears regulatory hurdles, the combined company will become the fifth-largest airline in the US. We also expect further consolidation in the technology sector and in consumer products industries such as food and beverages.

Geopolitical tensions could drive dealmaking on both the sell and buy sides. For example, ByteDance, a Chinese company, considered selling the US operations of TikTok because of security concerns raised by the US government. Efforts to secure, diversify, or localize supply chains (including “friend-shoring” to allied countries) could further spur M&A activity. For example, Germany-based Schwarz Group, owner of supermarket chains Lidl and Kaufland, agreed to buy Stora Enso’s Maxau paper production site to secure its supply chain.

The troubling economic news and prevailing uncertainty have not altered companies’ longstanding need to invest in digital capabilities. Acquisitions remain an important way to gain required technology, talent, and capabilities. Valuations in the technology sector have dropped sharply—for example, as of June 30, 2022, the enterprise value-to-sales multiple of the Nasdaq 100 had fallen by 35% from its level a year earlier. The lower valuations could lead to bargain hunting, and even companies that recently had IPOs might become affordable.

Although some companies face cash constraints, private equity firms have ample dry powder to use for acquisitions. Rising interest rates and an internal talent shortage may impede their efforts, but we expect them to adapt quickly. In addition, financial sponsors are increasingly pursuing club deals (that is, forming consortia with other sponsors or companies) and minority investments. They are also on the lookout for attractively priced corporate divestitures.

Moreover, approximately 300 SPACs currently in the market must find a company to merge with. If they fail to merge within the period specified in their governing documents (typically two years), they must repay their investors.

Beyond these traditional headwinds and tailwinds, we anticipate that environmental, societal, and governance (ESG) considerations will motivate an increasing number of deals, as discussed below.

A First Look at Green Dealmaking

Buyers have traditionally assessed corporate governance and environmental risks before signing a deal. Today’s ESG due diligence provides a more comprehensive view, combining a governance assessment with consideration of environmental and societal issues—and does so with regard to risks as well as opportunities.

In today’s business landscape, the importance of ESG considerations—especially those related to environmental and societal issues—extends well beyond due diligence. Because these considerations are a source of value, all companies should apply an ESG lens (among others) in evaluating their strategies and portfolios. They can then use acquisitions and divestitures to adjust their portfolios to increase their appeal to investors. Energy, oil and gas, and consumer products companies face especially high scrutiny, and many will actively manage their portfolios to achieve better ESG ratings.

According to BCG’s analysis, the number of deals primarily motivated by environmental considerations (that is, “green deals”) has doubled during the past 20 years, with a huge uplift during the past two to three years. (See Exhibit 4.) The value of these deals has also been increasing. In the next article in this series, we will examine green dealmaking trends in detail.