Managing Director & Partner
Over the past year, the M&A landscape faced its most prolonged challenges since the 2008–2009 financial crisis. Rising interest rates, geopolitical instability, and recession concerns were among the factors driving a slump in deal activity globally. However, since hitting its lowest point in the first quarter of 2023, global M&A activity is showing signs of revival. Looking forward, we expect the main deal drivers globally to be corporate portfolio transformations, ESG-related acquisitions and divestments, and digitization efforts.
Although the global landscape is straightforward to describe, we see much more nuanced pictures at the regional level. To gain clarity, we asked BCG experts in six regions to describe the state of play in their M&A market and share insights about near-term deal drivers.
BCG experts in six regions discuss the state of their M&A market and share insights about near-term deal drivers.
|The African Perspective by Seddik El Fihri||The European Perspective by Jens Kengelbach|
|The Japanese Perspective by Takashi Yokotaki||The Middle East Perspective by Samuele Bellani|
|The North American Perspective by Lianne Pot||The Southeast Asian Perspective by Jared Feiger|
Africa’s M&A market has experienced significant turbulence amid post-pandemic economic and geopolitical uncertainty. The renewable energy and material sectors have been bright spots, however, and seem poised to lead the market’s recovery.
The market’s downturn can be traced to the second half of 2022 when the region’s total deal value fell to $6 billion—a sharp 62% decline compared to the first half of the year. For context, the market surged to an all-time high in 2021, with deal values exceeding $44 billion, signaling that dealmakers were playing catchup after the initial shock of the COVID-19 pandemic had passed. The merger of the Angolan oil and gas businesses of BP and Eni contributed to this dealmaking peak.
The post-pandemic surge was followed by a reversion to more normal levels of M&A activity. Deal value in the first half of 2023 was $4 billion—a 73% drop from the first half of 2022, versus a 45% decline globally. However, the steep year-on-year decline masks the emergence of an active M&A market over the past decade that should promote continued strength.
Several sectors in Africa have bucked the recent downward trend:
In 2022 and the first half of 2023, the most active countries in the region in M&A volume and value were South Africa and Egypt, followed by Nigeria and Kenya.
Looking ahead, we see a mix of challenges and opportunities. Persistent global instability may dampen investors’ enthusiasm, leading to heightened risk aversion, especially toward investment opportunities in a continent with an extremely complex business landscape. An emerging movement toward increased protectionism among African countries could impede international investment flows to certain markets; conversely, however, it might spur transactions among African entities. The growing number of African-led acquisitions and the rise of Africa-focused sovereign funds, private equity investors, and family offices underscore the potential for more locally generated M&A activity. At the same time, global players from China, India, and the Middle East are steadily expanding their presence in Africa.
Several other trends and considerations are noteworthy:
Against this backdrop, the energy and materials sectors, along with the broader industrial sector, will likely maintain their momentum and spur the M&A market’s resurgence. Some companies in these sectors have robust balance sheets and available cash. They also stand to benefit from higher commodity prices. Their strong positions might lead them to recalibrate their diversification strategies in search of growth opportunities. Major industry players are likely to explore consolidating their market positions by leveraging regional platforms to expand their African presence.
The author is grateful to Jens Kengelbach, Oussama Bouziad, and Yiran Wang of BCG’s Transaction Center for their valuable insights and support in the preparation of this article.
We are seeing early signs of a resurgence in European dealmaking. Trends that should last well into the future support this revival and should drive activity beyond 2023.
Recent European M&A activity has mirrored global trends. Activity soared to record levels in 2021 and maintained momentum into the first half of 2022, followed by a slowdown in the latter half of 2022 that extended into early 2023. European deal value declined by 55% from the first half of 2022 through the first half of 2023, exceeding the 45% drop globally. Then came a rebound, as the second quarter of 2023 witnessed a substantial resurgence compared with the previous quarter. The main driver of this recovery was large deals (those valued at over $500 million). Despite this upswing, however, activity continues to trail long-term averages.
In Europe, the green technology, materials, and software sectors have remained relatively active in 2023, particularly for larger deals:
Private equity players made several prominent European deals, such as EQT's purchase of Dechra Pharmaceuticals in a deal valued at $5.5 billion. Even so, deal activity involving private equity and venture capital has dropped off significantly from its peak level. The proportion of European M&A deals involving private equity fell from 39% in 2021 to 36% in the first half of 2023—a steeper decline than the global average.
Beyond sector-specific trends, a defining moment for European M&A in 2023 was UBS's $3.3 billion rescue takeover of Credit Suisse in March. The deal played a vital role in stabilizing capital markets at the time. The trajectory of European dealmaking might have taken a drastically different turn had this transaction not proceeded smoothly. Moreover, the purchase price has proved to be a great bargain for UBS. Another major deal occurred in the packaging industry, with the merger of US-based WestRock and the Irish company Smurfit Kappa, announced in September and valued at $11.5 billion.
Although European dealmakers must contend with market volatility and macroeconomic and geopolitical uncertainty going forward, we see several immediate catalysts for M&A activity in today’s market:
From the sellers’ perspective, the need to finance investments in areas of growth will promote a rebound in divestitures and carve-outs. European divestment activity as a percentage of overall deal volume has been on a downward trajectory since peaking in 2019 and is now approaching the global average. In addition, we are seeing an uptick in European companies getting ready for an initial public offering (IPO)—from initial discussions to more concrete preparations—which signals an imminent comeback of IPO activity.
The author is grateful to Daniel Kim and Yiran Wang of BCG’s Transaction Center for their valuable insights and support in the preparation of this article.
Among the major economies in the Asia-Pacific region, only Japan experienced an uptick in M&A deal volume and value in the first half of 2023. Factors such as low interest rates, recent reforms, shareholder pressure, and slower organic growth will continue to foster a strong M&A market in Japan.
Japan's deal value in the first half of 2023 surged by approximately 50% compared with the first half of 2022. Other Asia-Pacific markets experienced double-digit declines, contributing to a 45% drop in deal value globally.
Activity in the technology and health care sectors fueled the Japanese M&A market:
Financial sponsors maintained their enthusiasm for Japan-based targets. From 2013 to 2022, sponsor-led deals focused on Japanese entities increased threefold. In 2022 alone, financial sponsors acquired more than 300 companies. Aside from Japan Industrial Partners’ takeover of Toshiba, one of the top deals in 2023 was JIC Capital’s announced acquisition of chipmaker and resin producer JSR Corp for $6.3 billion.
Going against the global trends, Japan's persistently low interest rates and abundant liquidity have heightened investors’ appetite for available opportunities. Against this backdrop, Japan's M&A trajectory will likely reflect the influence of improvements in corporate governance policies and a stronger focus on creating shareholder value.
Recent reforms by the Japanese government have prioritized inspecting companies whose stock is trading at less than the book value of their equity, diversifying boards, enhancing disclosures, and intensifying scrutiny of decisions to reject takeover offers. Mounting pressure from shareholders to produce higher returns, coupled with Japanese companies' lower valuations compared with their US and European peers, will also continue to promote dealmaking.
In addition, as Japanese markets have matured and experienced slower growth, companies are turning to M&A to open new avenues for growth and higher shareholder returns. To achieve greater revenue and profit growth, Japanese companies are using acquisitions to enable overseas expansion, the development of new businesses, and business model transformation.
The author is grateful to Jens Kengelbach, Ashish Baid, and Yiran Wang of BCG’s Transaction Center for their valuable insights and support in the preparation of this article.
M&A activity in the Middle East has been more resilient than in the overall global market. The region’s sovereign wealth funds and state-owned entities have been especially active. Economic diversification and enhancement of digital competencies will help drive near-term dealmaking.
Megadeals fueled record levels of Middle Eastern M&A activity in 2019, and the dealmaking momentum continued into the first half of 2020. Since then, the market has experienced lower, albeit average, levels of activity. Deal values in the first half of 2023 were similar to those in the first half of 2022, compared with a 45% decline globally. In contrast, deal volume in the first half of 2023 declined by 22%, versus a 15% decline globally. The region's M&A activity in the second quarter of 2023 was much stronger than in the first quarter, propelled primarily by larger deals.
Despite the prevailing market headwinds, Middle Eastern energy, chemicals, and technology sectors have remained relatively active in 2023. This is particularly true with regard to larger deals. Examples include the following:
Although private equity and venture capital firms experienced a significant decline in global deal activity since the beginning of 2022, Middle Eastern sovereign wealth funds, along with the companies they support, bucked this trend. Armed with substantial capital and liquidity, they are investing across various regions, sectors, and themes. These firms have adopted varied, long-term strategies to diversify in directions other than simply those involving natural resources and to support the growth of their national economies.
To maintain an upward trajectory, Middle Eastern dealmakers must navigate uncertainty surrounding fears of a global recession as well as ramifications of geopolitical conflicts and existing tensions. Amid these challenges, two near-term drivers of M&A activity are especially notable:
From the perspective of sellers, strategic portfolio reviews will lead to corporate divestitures and initial public offerings (IPOs), as investors and companies seek to monetize some of their investments and redirect the funds toward other growth opportunities. IPOs also serve the strategic purpose of developing local capital markets.
M&A activity in North America reflects global patterns. After achieving record highs in 2021 and maintaining momentum through the first half of 2022, dealmaking began to decelerate in the latter half of 2022 and into the first half of 2023. From the first half of 2022 to the first half of 2023, North American deal value declined by 37%, compared with a 45% drop globally. North American deal activity in the second quarter of 2023 matched levels seen during the initial shock of the COVID-19 pandemic in the second quarter of 2020, significantly trailing the long-term average for both large deals (those exceeding $500 million) and smaller transactions.
Despite these headwinds, the North American health care, energy, and materials sectors have remained relatively active in 2023, particularly for larger deals:
After a flurry of transactions, the technology sector has entered a quieter period with reduced activity. Private equity and venture capital have similarly seen significant declines in dealmaking.
The current regulatory environment is challenging, with recent merger guidelines released by the US Department of Justice and the Federal Trade Commission signaling increased scrutiny. As of August 2023, approval is still pending for several significant deals, including Microsoft-Activision and Broadcom-VMware.
North American dealmakers returning to the negotiation table will continue to grapple with uncertainty regarding the likelihood of a recession as well as with market volatility and geopolitical tension. Amid these challenges, we see several near-term drivers of M&A activity:
In addition, the scarcity and higher cost of capital will lead to corporate divestitures as companies seek to finance investments in areas of growth. Although divestitures in North America (as a percentage of overall deal volume) have steadily rebounded over the past two years, they still trail global levels. We also expect that private equity firms will continue to be active buyers of corporate carve-outs.
Evolving regulations and increased scrutiny could delay deal execution, but we anticipate that dealmakers will adapt to longer timelines to closing and will intensify their efforts to anticipate and mitigate potential regulatory obstacles.
M&A activity in Southeast Asia (SEA) has declined since peaking in 2021. Going forward, however, outbound M&A from acquirers in China and Japan could support an increase in M&A in the region. Singapore is poised to be the primary dealmaking hub within the region.
After reaching record highs in 2021, SEA deal value cooled in 2022, dropping by 40% from the previous year. This plunge reflected the absence of any mega tech deals of the magnitude of 2021’s $8 billion merger forming GoTo or the public listing of Grab via a $34 billion merger with a special-purpose acquisition company (SPAC).
The global economic challenges of high interest rates, inflation, supply chain disruptions, geopolitics, and regulatory changes continued to affect dealmaking in the first half of 2023. Although SEA's deal value fell by 15% compared with the first half of 2022, that figure is still better than the global decrease of 45% over the same year-on-year period. The region’s dip primarily resulted from a reduction in the number of large deals, which were significantly below both pandemic levels and long-term averages.
The automotive and food and beverage sectors in SEA have remained active in 2023, particularly for larger deals:
Outbound M&A activity from China and Japan has significantly influenced SEA cross-border deals. The number of Chinese companies pursuing external deals has substantially decreased due to the pandemic, geopolitical tensions, and regulatory obstacles, leading to a steep reduction in Chinese companies' acquisitions of cross-border targets. Owing to its geographic proximity to China and the more limited acquisition opportunities for Chinese companies in European and American markets, SEA is likely to become a preferred destination for Chinese outbound investments if they pick up. Moreover, Japanese acquirers could pursue M&A deals in SEA to offset slower domestic growth opportunities in Japan.
Within SEA, Singapore is likely to account for the lion’s share of deals because its investment climate and financial sector have proven more robust than those of other countries in the region. Conversely, dealmaking in Indonesia may be more subdued, as investors exercise caution in anticipation of the country's general elections in February 2024.
Overall, as interest rates continue to stabilize and the macroeconomic picture comes into sharper focus, valuations will become more certain and dealmaking should increase within SEA to fuel further growth.
The author is grateful to Jens Kengelbach, Ashish Baid, and Yiran Wang of BCG’s Transaction Center for their valuable insights and support in the preparation of this article.
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