Raghu Marwah & Anmol Bansal
by Raghu Marwah & Anmol Bansal
The trio of inflation, interest rates, and geopolitical uncertainty has had a sobering impact on M&A valuations. Determining the impact in terms of good or bad, positive or negative, favourable or unfavourable varies on case-to-case basis. Examples of healthy valuations which remain largely unaffected are few but do exist, reflecting the fundamental need for sound M&A ideas supported by seamless operations and backed by experienced mentors. On the other hand, the majority of valuations have faced pandemic heat despite 2021 being one of the most bullish years in over half a century.
To reiterate, these recent upheavals have led to a correction of valuations in various sectors, leaving technology stocks hammered. The ripple effects, as a result of the pan tech-enabled universe, are having far-reaching consequences on other sectors.
Macro events such as inflation, interest rates and geopolitical uncertainty have set the stage for a more challenging deals market. The uncertain geopolitical stance just before the Russia-Ukraine conflict hinted towards supply-chain disruptions which led to inflationary pressure and eventually resulted in central banks hiking interest rates. The US Fed to-ing and fro-ing with interest rates, and ECB, Swiss National Bank, RBI, and others hiking rates did not achieve the intended result of keeping inflation in check.
US overall inflation is up by 9.1 percent and energy prices have inflated by over 40 percent in the last twelve months. This is turning out to be very bad for consumers and worse for deals markets. Eurozone’s annual inflation witnessed record levels of 8.9 percent in July 2022 compared to just 3 percent in August 2021, proving lethal for the deals market as confidence in the market takes a dip.
M&A deal value in first two quarters has been low compared to record levels last year. Global M&A deal value has declined 21 percent, and the deal volumes registered a drop of 17 percent, even though the deal value managed to reach a significant total of USD 2 trillion. The year’s second quarter had a higher global M&A value than Q1 despite deal volumes slowing and this made Q2 2022 the third-highest Q2 on record.
Megadeals have been one of the biggest supports for global M&A value and have surged more than USD 10 billion compared to previous times. Europe has remained resilient compared to the US and MENA regions by seeing a drop of only 4 percent in value and 8 percent in volume. Whereas the US has replicated the global numbers, witnessing a 28 percent drop in deal value and 22 percent in volume. The MENA region suffered the most with deal values down 49 percent and deal volume down by 22 percent. India, the only rise amongst the falls, has registered an increase of 124 percent in deal value and a modest increase of 32 percent in deal volume.
Recently, the SoftBank Vision Fund recorded losses of USD 17 billion in the quarter ending 30 June 2022, indirectly recognising the valuations correction and urging unicorn founders to accept lower valuations if they want to continue to raise funds.
Raghu Marwah, a qualified Chartered Accountant with a Bachelor of Arts (Economics), joined the RNM team after having gained experience at one of the Big 4 firms. He specialises in advising and rendering consultancy services to clients in relation to structuring strategic investments, offshore structuring, cross-border holdings, M&A, and valuations. Contact Raghu.
Anmol Bansal, with a BSc (Hons) in Accounting & Finance from University of London, is an Analyst with RNM Capital. He works with startups, incubation centers and family offices in various areas like strategic investments, valuations, M&A and cross-border transactions. Contact Anmol.
Established in 2009, RNM Capital Advisors (RNM) is a mid-market focused boutique investment banking firm. RNM provides advisory services to its clients across sectors and geographies in the area of mergers & acquisitions, joint ventures/collaborations, fund mobilisation, restructuring & turnaround, valuations, due diligence, India entry, family office, alternative investments and other allied corporate finance matters.
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