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M&A ETF Beats S&P 500 in 2022: What Awaits in 2023?

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Dealmaking in the global M&A market has been somewhat muted in 2022 due to a global growth slowdown. Advisory firm Willis Towers Watson said that for the first time in over three years, there were no mega deals valued over $10 billion during the third quarter, as quoted on CNBC.

There were only 49 large deals valued over $1 billion during the quarter compared with 67 large deals closed in the same period a year ago. A host of factors like geopolitical tensions, sky-high inflation, rising interest rates and fears of a global recession have acted as headwinds for M&A in 2022.

Global M&A activity in Q3 declined for the third straight quarter. Their data showed total deal value reaching $1.04 trillion in Q3, down 14% from $1.2 trillion in Q2. The latest tally was the lowest since Q4 of 2020. Data also showed deal volume hitting 10,118 in Q3. This is down about 3.3% from the previous quarter, which saw 10,463 deals.

Deals in North America were down in Q3, with about $487.9 billion in M&A transactions in the quarter. Europe witnessed 4,226 M&A transactions in Q3, totaling $414.6 billion. This value remained relatively flat with Q2.

However, some industries have seen a better deals environment. These include business products and services, aerospace and defense, and supply chain. The Pitchbook report shows deals in business products and services increasing with 2,399 deals in this area for Q3.

What Lies Ahead?

While the ongoing tighter monetary policies are headwinds as these raise the cost of deal financing, a sharp stock market decline in 2022 also made many targets available at cheaper prices. Per Pitchbook analysts, "European investors are expected to face stronger headwinds in Q4—including a worsening energy crisis and a darkening economic outlook. Yet, a weak euro or pound may lure more US buyers to bargain-hunt in the European market."

Advisory firm Willis Towers Watson highlighted a few factors that could drive deals in 2023. “The fundamentals that drive dealmaking are still in place and, with valuations moderating after the historic levels reached in 2021, strategic and financial buyers alike will take advantage of better-priced opportunities for growth,” as was stated by WTW.

The tech sector could see a flurry of deals in the AI and machine learning markets in 2023 with the need for speed in digital transformation across all industries. The stressed operating environment may also prompt companies to divest non-core assets, WTW said. For example, energy firms could continue to sell off carbon-intensive assets as there has been a chorus for a green energy transition.

However, due to the challenging economic environment, one should expect smaller deals in 2023 as a part of the “lipstick effect,” indicated WTW. Against this backdrop, below, we highlight the pureplay M&A ETF that should be under watch. The fund MNA (down 1.3%) has beaten the S&P 500 (down about 17%) in the YTD frame (as of Dec 16, 2022).

IQ Merger Arbitrage ETF (MNA - Free Report)

The underlying IQ Merger Arbitrage Index seeks to identify opportunities in companies whose equity securities trade in developed markets, including the United States, and are involved in announced mergers, acquisitions and other buyout-related transactions. The fund charges 76 bps in fees.

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