Second Half 2022 M&A Outlook Drivers: Tax changes, Inflation, Economy, Interest Rates, plus industry sector analysis

Global mergers and acquisitions (M&A) activity may have been down by 27% in the first half of 2022 compared to the first half of 2021, but is up 35% compared to the average of the previous cycle (2015-19), according to EY. The primary contributor to 2021’s transaction boom was SPAC funds that have since cooled off.

In the face of rising inflation and potential economic headwinds, M&A activity in the US has remained resilient so far this year. The US contributed 31% of global M&A activity in the first six months of the year.

Private capital is flowing into funds that will continue to spur deal activity. With a frothy real estate market and weaker public markets, many private and institutional investors are seeing significant value in privately held companies. Many private company owners are working to close a transaction in the coming months and avoid the uncertainty of the  economic, inflationary and tax environment in 2023.

The greatest competitive market shifts take place during times of turbulence. According to Bain & Company research, companies that invest throughout the economic cycle have far superior returns than those that participate sporadically. Recession winners average 14% in compounded annual EBIT growth in the 13 years following a downturn compared with zero for recession losers, according to Bain’s study of nearly 3,900 companies. And as the winners adjust their corporate strategies for times of uncertainty, they continue to use M&A as one of the big levers to gain and strengthen their competitive advantage.

Tax changes in 2023

The Biden Administration’s FY 2023 Budget and Treasury Green Book, proposes significant tax changes that could impact private business owners considering estate planning and selling a company. The proposed changes include:

Increase the corporate income tax rate from 21% to 28%;

higher top rates for individual income and capital gains income;

20% minimum tax on individuals who have more than $100 million in assets;

end step-up in basis by making death a taxable event;

restrict deferral of gain for like-kind exchanges under section 1031

a laundry list of new minimum taxes for individuals, businesses, and international corporations.

Inflation and interest rate risk

The July figures showed that U.S. consumer price increases rose 8.5% year over year. The public markets responded favorably, because they were expecting worse and many believe we may now have passed peak inflation. Compare this reaction to the panic in March, when consumer prices firs thit 8.5% year over year – what a difference a few months makes.  The Federal Reserve will weigh this July inflation report, along with other key economic data, when they meet in September and discuss the next interest rate hikes, with potential for the Fed to limit rate hikes to 0.5%. The Fed had previously stated they saw inflation is transitory, so this will be a relief as they may consider slowing the pace of monetary tightening.

This is also good news for business valuations, as the cost of capital to acquire a company increases when rates rise. Debt service will increase and this puts downward pressure on business valuations, as an acquirer needs to contribute additional equity or alternative financing to cash flow the same purchase price.

What else is on the horizon for M&A?

Business owners may be contemplating selling in any given year but are often motivated by a trigger event to take action and sell, responding to a prospective buyer or engaging an M&A firm to guide them through the process.  As discussed in the research below, many business owners are feeling now may be a good time to sell.  The pipeline continues to be strong for new businesses coming to market. Analysts expect 2023 to be a strong year for M&A activity, with capital stacking up to be deployed.

In the section below, we consider the M&A outlook for several key industries in our region.

Aerospace and Defense

Losses this year in commercial aviation are likely to total $9.7 billion as air travel begins its recovery from the COVID crisis, IATA said in June, 2022, an improvement on the $11.6 billion deficit predicted at the previous gathering in October 2021.  Airline financial performance is expected to improve in all regions in 2022, with North America the only region expected to return to profitability this year. Cost pressures will be a focus for airlines this year as oil and fuel prices have risen sharply. In some markets, labor shortages have created near-term challenges for costs and operations.  Airlines globally are expected to return to profitability in 2023.

With these challenges in commercial aviation, major players have been shifting focus to military business.  However, larger deals in the defense sector will be limited by US regulators’ concerns over consolidation and potential monopolies.  The Russian invasion of Ukraine altered the US’ national security position from the threat of non-state terrorist organizations to nation states at war. With this backdrop, Congress passed an increase in defense spending of nearly 6%, a total expected to keep rising.

Aerospace deal activity remains subdued, but certain sectors (cyber, AI, and unmanned technologies) remain strong.

SPAC (special purpose acquisition company) transactions dominated last year, but have all but disappeared in 2022.  JetBlue and Spirit Airlines announced their intention to merge.  Other transaction activity highlights included MRO (Maintenance, Repair and Overhaul) and FBO (Fixed Based Operator) targets.


Deal values remain strong in chemicals this year due to the largest megadeals in two years, Celanese’s announcement to acquire DuPont’s Mobility and Materials unit.  The number of chemical deals declined during the first half of the year.

Chemical companies will move to M&A activity as they seek to mitigate risks to supply chains, protect margins, and realign portfolios.

Even with economic and other headwinds, fundamentals remain strong in chemicals with high levels of capital for deployment, strong balance sheets in the industry, and the need for continuing business transformation. Analysts are optimistic for chemical deal activity in the second half of the year.


The first half of 2022 saw slower deal activity in energy; however, the last twelve months still showed an increase in deal value and volume over the previous twelve months.

Acquirers are becoming increasingly focused on their core strategy and are uncharacteristically disciplined in how they deploy capital.  Even with high energy prices and a boom in profitability, institutional capital remains shy about reentering the oil and gas markets, with many companies pivoting to an ESG (Environmental, Social, and Governance) focus in response to investors’ promotion of sustainable, socially responsible and mission-related investing.

The above notwithstanding, persistent high commodity prices have executives rethinking investment in traditional oil production.  Private companies have been taking advantage of the higher prices and are look at acquisitions with their available free cash and solid balance sheets.

Midstream faces the rising cost of capital for new pipeline construction.  As a result, some larger companies have been looking to expand their networks by acquiring smaller players rather than building new pipelines.

The industry as a whole, has been dealing with continuing labor shortages, supply chain disruption, and inflation.

Engineering and Construction

Engineering and Construction companies have enjoyed a brighter deal environment with available cash and the Infrastructure Investment and Jobs Act; even in the face of rising interest rates, supply chain issues and slowing economic activity.  Deal activity in engineering and construction has risen back to pre-COVID levels.

The construction industry added jobs in May, bringing the total industry employment above February 2020 levels. Continued supply chain issues and concerns of increasing interest rates have led to a decrease in housing starts, even though pent up demand for housing remains.

As the market responds to inflationary pressure and a higher cost of capital, companies will need a highly focused approach to M&A activity.


Healthcare deal activity was down compared to the first half of 2021, yet some subsectors continue to show strength despite the same headwinds referenced above in other industry sections.

Increased deal volume during the last twelve months, compared to the twelve months prior, has been the result of roll up transactions.  This consolidation is supposed to bring together the fragmented elements of the healthcare system to create a rounded ecosystem of quality and patient-centric offerings.  The success of this consolidation will be monitored over the coming months and years.

Long-term care and physician medical groups continue to be two of the most robust subsectors in deal volume and value.  Driven by the pandemic, alternative care capability such as home health, also posted significant transaction volume over the first half of the year.

Like many industries, healthcare faces issues with supply chain shortages and labor concerns.  Deals involving innovative technology or alternative care options could increase efficiencies and counter staff shortages.

Industrial Manufacturing

Industrial Manufacturing M&A has been hindered in some sectors due to inflation, freight costs, and raw material price volatility.  However, many corporations are sitting on high cash reserves, targeting acquisition and carve-out divestitures, all of which are potential for increased deal activity.

Focus on supply chain will continue to be top of mind.  Many business owners that have successfully navigated COVID and a recovery are considering a sale now while valuations remain high.  There is uncertainty about the economic outlook and inflationary environment. Stronger recent financial performance and potential downside risks are triggering sellers to plan for a sale.  Industrial manufacturing acquirers are remaining focused on fit and alignment to their existing business model and strategic goals.

Transportation and Logistics

Deal value was up over the last twelve months in transportation and logistics, with increases in trucking, passenger air and shipping.  Logistics was the leading subsector in deal volume.

M&A activity is expected to remain high as companies combat ongoing challenges with covid variants, supply chain disruptions and supply/material shortages.  Near-shoring and supply chain control will be catalysts for deal activity.

Trucking M&A activity is strong and valuations are high as companies seek to solve labor and equipment issues through acquisitions.

Technology and digitization continue to be a focus to increase efficiencies, mitigate delays and allowing for improved fleet management, quicker and pro-active decision making.


Sources: This report has been compiled from reports and research including federal data, independent analysis, EY, Federal Reserve, Reuters, Janes Capital, US Chamber of Commerce,, Kaufman Hall, DC Advisory, Kiplinger, PCE-Companies, Mergermarket, PricewaterhouseCoopers, and SDR.