Russia’s invasion of Ukraine has halted the surge of M&A activity that began last year and that was still rising at the beginning of this year in Europe, US and Asia. As a result of that surge, submissions continued to grow in January which is typically a quieter month, and we are still seeing increasing numbers into March.
There has also been an increase in Mega Deals, many of which use M&A insurance protection due to their complexity and size. In the past, the market typically saw one Mega Deal a month but at the beginning of the year we were seeing 2-3 per week.
In the last month a number of deals have not progressed or are now on hold due to market volatility. There is also nervousness around Russian involvement in deals and dealmakers do not want to contravene sanctions that have been put in place. This uncertainty is also impacting Mega Deals, which are slowing after their peak at the start of the year.
The Russian invasion of Ukraine, like any other macro event creating uncertainty, is leading to a slowdown in M&A activity. There is volatility in interest rates, currency and raw input costs that will lead to caution in the market. As we saw with COVID, this crisis will also further exacerbate supply chain difficulties and this may call into question the viability of certain businesses, making valuation difficult. The M&A market requires stability to allow pricing models to produce rational and effective valuations. However, in spite of all these challenges, there will be investors who continue to seek deal-making opportunities.
Dry powder available in the PE market
The pandemic has brought the majority of private equity players into sync and allowed them to enjoy a phase of growing their acquisitions before divesting out of them, but, surprisingly, and in spite of this, available cash still abounds. The need to make returns for investors, the high inflationary environment, and a number of undervalued assets may lead to private equity firms taking the opportunity to invest further.
However, we have seen that the strategics are definitely being more cautious, particularly as a number of deals have already fallen over. Some of those that do not have to make aggressive returns to investors will most likely move their cash into stable asset classes to make money on interest.
While there may be less deal volume as a consequence of all the political uncertainty, those deals that are being done are more likely to buy insurance, simply due to the unpredictable nature of the market and an inherent desire to dial down risk wherever possible in a volatile situation.
M&A market to remain strong for H1
The M&A market will remain strong through the first half of 2022, as the market digests the impact of the Russian invasion of Ukraine. It will continue to be fueled by the record number of deals in 2021 and an increase in the number involving M&A insurance, a trend that will continue throughout 2022.
Deal activity may begin to suffer if interest rates rise further, causing the cost of capital to increase, as businesses start to look at alternative sources of revenue such as cash or treasury bonds.
Claims on the increase
The number of claims will increase over the next year as businesses continue to face further regulatory reforms and economic challenges.
Claims related to tax issues are likely to continue to grow as regulatory authorities increase scrutiny and compliance to strengthen budgets depleted by Covid-related recovery spending. This concern is already driving increased interest in tax liability cover for M&A deals.
A number of other factors will also lead to increased claims inter alia employment-related ones linked to pandemic induced shutdowns. Claims related to ESG will likely grow as certain authorities move towards green economy adjustments. Inflation will also continue to impact M&A claims.
A number of headwinds will begin to impact the current growth trajectory of the M&A market. However, opportunities do remain for those more liquid companies. At Liberty GTS we understand the challenges that come with transacting in a volatile market but we can support our clients in navigating turbulent times.
