The Future Of M&A And How The FTX Scandal Impacts It

2022 has undoubtedly seen a significant slow down in M&A activity. With the ongoing Russia-Ukraine crisis having caused international trade and supply chain disruptions and a commodity price shock and subsequent cost of living crisis, it is no surprise that the IMF has warned of the global economic outlook “darkening significantly”. With inflation and interest rates currently at record breaking highs and looking to continue to increase, the increasingly imminent threat of a recession is evident. It is no surprise that the financial services have been severely impacted - in particular, having impacted both the actual procedure of, and sectors within mergers and acquisitions.

With the S&P 500 having declined 18.2% from the beginning of the year, M&A in H1 2022 has certainly seen a drop (27% by value and 18% by volume) compared to this time last year. In the midst of geopolitical tension, we have seen a significant decrease in cross border transactions, H1 levels having decreased from its average of 30% over 2015-19, to 24% this year. Sectors that have been adversely impacted include financials, healthcare, and energy and utilities, which respectively reported a 74.4%, 61.3%, and 40.7% decline as of February.

However, despite such apprehension, industry leaders and market analysts are divided as many remain hopeful on the future of M&A throughout the rest of this year, and into 2023. A PwC analysis found that deals made during such a “downturned” period of the global economy can actually bring better returns and achieve outsized growth, and it is also worth noting that not all types of M&A transactions will be mitigated. Acquirors may also be willing to use their pressured stock as a currency in stock-for-stock transactions where relative values have stayed consistent- structural transactions where stock prices are less relevant should also proceed uninterrupted, as they are not as impacted by the raised interest rates.

This includes Kellogg’s announced plan to split into three separate companies. Different sectors have also maintained somewhat consistent growth, or have been predicted to continue apace throughout this year and next. For example, despite its activity decreasing 20% from last year, technology still accounted for nearly a third (31%) of global M&A activity so far, and deals focused on technology targets are now back at double the level of the previous cycle. Despite capital market conditions having tightened sharply, there has also still been a strong flow of private capital driving activity, potentially allowing for private equity firms to drive M&A activity for the rest of the year - Deloitte has recently announced that private equity firms have an estimated $2.5trn ready to be invested in insurance M&A opportunities. The pharmaceutical sector has also been predicted to experience increased activity, with big pharma corporations now looking to invest in the many biotech companies facing patent cliffs, and are in need of new assets. Finally, cryptocurrency could also provide increased global M&A activity, as the sector already exceeded last year’s record pace with 92 crypto M&A deals having been made during H1 2022. Such predictions perhaps suggest that despite the fragile global economy and volatile markets, M&A could potentially continue apace for the rest of the year.

However, with the scandal of FTX, Alameda Research and Sam Bankman-Fried there remains a high level of uncertainty in the crypto market. FTX, a cryptocurrency exchange, was accused of fraudulently and illegally footing the bill of its sister company Alameda Research by paying for its liabilities, with the money of FTX users. Alameda Research CEO Caroline Ellison disclosed to her employees that herself, Sam Bankman-Fried (FTX Co-Founder/CEO), Gary Wang and Nishad Singh knew that client deposits were transferred to Alameda from FTX. Consequentially, FTX has been in US Chapter 11 bankruptcy proceedings due to a liquidity crisis. From a company once valued at $32 billion in January 2022 after Series C funding of $400 million, FTX is now predicted to have a value closer to $0 as stated by Forbes. In 2021, FTX had a peak of over a million users however, their money that they have put into the exchange now hangs in the balance from the average individual to investors such as Seqouia Capital, SoftBank Group, BlackRock and even the Ontario Teachers’ Pension Plan.This turbo charged a mass loss of confidence in the crypto market with many individals withdrawing their assets and investors such as Seqouia Capital writing down its equity in FTX to $0 on 9 November 2022 - this lost Seqouia Capital some $214 million. The uncertainty in the market is set to continue into next year due to the downfall of the world’s second largest cryptocurrency platform, FTX. Thus, a loss in confidence in the use of crypto could further galvanise the reduction of M&A deals within the sphere even further as there are more calls for a regulatory crackdown on crypto.

In short, it will be interesting to closely follow a range of sectors that have been argued to have potential - pharma, crypto, technology, and insurance- and to see how the impacted aspects of M&A continue to slow down. Only time will tell if this decline in activity merely forms part of its naturally cyclical nature, or if this pessimistic outlook will prove itself to be true for the rest of the year.

By June-Seo Chung