Full Scale War: A Blow for the Global Economy and M&A deals?

As well as inflicting unnecessary pain and sufferance to 45 million people, Russia’s unprovoked attack on Ukraine has a been a huge setback for the global economy drastically increasing uncertainty about the recovery in the wake of the pandemic.

The already existing threats have worsened. The war has raised long-term inflation expectations. Many countries have seen inflation rising. Until recently, central banks saw inflation trends as a temporary effect of the pandemic and related supply bottlenecks. However, the outlook has now changed since the two countries involved in this conflict are major suppliers of energy, metals and agricultural products. 

The supply chains of virtually all products manufactured worldwide have energy as a key component. Many sectors also feature either metals or agricultural products in their making process. Shortage of these raw materials caused by the war is already having a huge impact on prices accelerating inflation trends.

Outman sees two major factors as key in forecasting consequences of the war on the global economy. The first one is time. With little progress in negotiations between the two sides, what was supposed to be a blitz war could go on for months. Continued support of Ukraine by Western countries on one side and economic sanctions on Russia on the other may cause the conflict to stall and have enormous repercussions on the global economy.

Secondly, China’s actions in the war will be decisive in the magnitude of economic consequences. Active participation of the Asian giant on the Russian side could turn into sanctions by Western countries and global supply of goods and transportation could literally collapse.

M&A market has already been affected by this situation. The volatility of the market seen since the beginning of the was has put equity firms into wait-and-watch mode. High-value transactions have been delayed due to uncertainty. Even before the Russian invasion, the European market boom of 2021 had started to show signs of fatigue, declining over 20% YoY in the first two months 2022. 

Therefore, the first semester of 2022 is likley to continue to slow down in M&A operations. Particularly high value transactions are likely to be pushed back until later in the year. Nevertheless, evidence gathered during the pandemic and the 2007 financial crash shows that companies with a bold M&A strategy during an economic downturn typically outperform those that stick to a more conservative approach. Times of uncertainty also bring opportunities. Companies that were struggling before the conflict may see opportunities to merge with more solvent companies. Mergers often bring procurement sinergies much needed in time of raw material scarcity. Well executed commercial due diligence (CDD) processes are paramount to identify sinergies that are not always obvious.

Businesses are in the early days of assessing the impact of the war and its main macro-economic consequences. It’s a good time to start examining potential acquisition targets since assets of companies that were already planned to be sold may become more accessible. 

Of course, the deep recession that will face Russia which stands as the 11th economy of the world will affect the global economy including the M&A sector. Sanctions on Russian oligarchs and the freezing of Russian assets in most parts of the world will paralize many deals planned for this year. However, new M&A opportunities will come and new deals will be closed even if the conflict persists.