America’s M&A deal count went from a tepid 4,200 in 2020 to a manic 10,600 in 2021, a 2.5x leap, the biggest on record. See M&A Factoid #2: What Drove the Huge 2021 Boom? for why.
But by 2023, it had collapsed 42%. What happened? Here’s what we and others, mostly McKinsey, think. Understanding what caused this crash may help you see the next one coming.
Inflation
Pandemic lockdowns idled manufacturing and transportation labor, driving costs up, while unprecedented government spending drove the dollar’s value down. This pincer movement jacked the official inflation rate from 1.4% in 2020 to 7% in 2021. (Many economists believe the real inflation rate exceeded 15%.)
Inflation and the operating disruptions caused by lockdowns also diverted managers' attention away from M&A-driven growth and toward cost-cutting and firefighting.
Cost of Debt
Struggling to control inflation, the Fed pushed the Prime Rate from 3.25% in early 2020 to 7.5% by the end of 2022. Nothing kills the acquisition appetites of PE firms quite like expensive debt.
Perceptions of Global Risk
Brent oil prices jumped from $40/bbl in 2020 to $120 in 2022 due to a combination of Russia’s invasion of Ukraine and pent-up commercial energy consumption when lockdowns relaxed. The extreme volatility of energy prices and prospects of a greater war created uncertainty about the future. Despite Nathan Rothschild’s advice to invest while there’s blood in the streets, most investors hid in the basement.
Regulatory and Antitrust Clamp Downs
In 2022, the Biden administration’s FTC delayed or blocked multiple large, high-profile would-be acquisitions, including Microsoft's proposed acquisition of Activision Blizzard. In addition, the administration’s DoJ made 70% more HSR (Hart-Scott-Rodino) antitrust filings in 2021 versus 2020. Red tape enforcement and government lawsuits both kill deals on the table and scare off those thinking about completing one.
Public Market Losses
The S&P 500 dropped 19% in 2022, another indicator of investor uncertainty. As public company valuations go, so go M&A valuations, causing sellers to balk. Also, in an even clearer sign of depressed “animal spirits,” the number of US IPOs dropped dramatically from 1,035 in 2021 to 181 in 2022, a decline aggravated by globally uncompetitive US regulations.
There You Have It…
The rockiest ride for M&A deal-making since deal counting began, much of it related to government actions in the market. So, if you see an administration with social engineering and regulatory ambitions enter office, word to the wise.
Stay tuned for an upcoming Factoid where we’ll describe where M&A deal activity is now.
Meanwhile, deals do march on, no matter what environmental factors are in play. That’s because the circumstances of company owners and their businesses are as important. To learn what those circumstances are, see my When Is the Best Time to Sell a Business?
Indeed.
Wondering what the counterfactuals would have yielded.