Peter Gray, Partner, Cavendish

In our last global M&A market update in December, I suggested that geopolitical risk was one of the few clouds on the horizon threatening the health of the market. What we and no one else predicted was how rapidly that risk would materialise in 2022 with the Russian invasion of Ukraine and the huge uncertainty that has created in financial markets.

Even before the Ukraine invasion, after a record level for Global M&A activity in 2021, the market has experienced something of a slowdown in the early stages of 2022. Since the outbreak of war in Ukraine, the market has cooled further, at least in terms of big ticket M&A deals, with a fall in the number of deals announced and some deals which had previously been announced such as the Spectris offer for Oxford Instruments, falling victim to the clouds of uncertainty. The latest data from Refinitiv suggests that just over $1tn worth of deals were struck in the first quarter of this year, down 23% on the same period last year.

Some of the more speculative elements of the global M&A market have, not surprisingly, seen very steep declines. The number of SPAC deals for instance has seen a sharp decline with 78 just deals in 2022 to date compared to 761 for the corresponding period last year.  Furthermore, the share prices of some of the technology companies that attracted a significant amount of SPAC money have collapsed. Cazoo, one of the highest profile UK companies to launch a SPAC in the US last year, has seen its share price fall from $10 to around $2.60.

So, what is the outlook for the remainder of 2022?

In addition to the Ukraine conflict, inflationary pressures, in part war related, have also injected an element of uncertainty into the market in terms of the ability of firms to protect their profit margins in the face of significant cost pressures. There are also concerns around the impact of inflation on real disposable incomes and hence consumer spending.

The rising interest rates we are seeing, designed to dampen down inflationary pressures, will exacerbate the pinch on consumers’ pockets and depress economic growth rates. Increased interest rates have already been a negative for equity markets and have contributed to the significant correction in the valuation of US tech stocks (the tech laden Nasdaq index having fallen over 20% from its 2021 peak) and we are seeing evidence of this causing some softening in the pricing of technology business in the M&A market. D2C (direct to consumer) businesses, in particular, have seen valuations fall away as the positive impact of the pandemic on their businesses has waned.

Facing the headwinds described above, we are expecting a decline in activity levels over the course of 2022 relative to the stellar performance of the market in 2022.

Having said that, the wall of money available for investment in M&A transactions is not going anywhere and it has had the effect of significantly increasing the M&A market’s resilience to external shocks and reducing its cyclicality.

At a microeconomic level, there will of course be some significant beneficiaries of the current political instability with the defence and security and green energy sectors for example, likely to see a major boost in their fortunes and in levels of M&A activity. We are also expecting to see an increased level of M&A activity in the travel and leisure sector as the remaining Covid related travel restrictions are removed and leisure travel continues its recovery to pre-pandemic levels.

At finnCap Cavendish, we have had a strong performance in the past 12 months, despite the uncertain market conditions. A significant percentage of the deals on which we have advised have been cross border transactions involving either overseas private equity or trade buyers, in many cases identified by our international colleagues within Oaklins, the global advisory firm of which we form part.