Daily Management Review

Global M&A Is Bracing For A Dry Period As Boardrooms Pause Expansion


Global M&A Is Bracing For A Dry Period As Boardrooms Pause Expansion
Global dealmaking is experiencing a dry spell as soaring inflation and a stock market crash dampen many company boards' desire to expand through acquisitions.
Russia's invasion of Ukraine in February, as well as fears of an impending recession, dampened merger and acquisition (M&A) activity in the second quarter.
According to Dealogic data, the value of announced deals fell 25.5 per cent year on year to $1 trillion.
"Companies are standing back from M&A in the short term as they are more focused on the impact of a recession on their business. The timing for dealmaking will come but I don't think it's quite there yet," said Alison Harding-Jones, Citigroup Inc's (C.N) EMEA M&A head.
According to Dealogic data, M&A activity in the United States fell 40% to $456 billion in the second quarter, while Asia Pacific fell 10%.
The only zone where dealmaking did not collapse was Europe. The quarter saw a 6.5 percent increase in activity, partly due to a flurry of private equity transactions, including a 58 billion euro ($61 billion) take-private bid for Italian infrastructure giant Atlantia by the Benetton family and US buyout fund Blackstone.
"We are nervous about the back half of the year but transactions are still happening," said Mark Shafir, global co-head of M&A at Citigroup.
Broadcom Inc's $61 billion cash-and-stock acquisition of VMWare Inc in the United States was the largest transaction of the quarter.
Others included Elon Musk's proposed $44 billion takeover of Twitter and a $40 billion deal by India's largest private lender HDFC Bank to buy out its biggest shareholder in order to establish a financial services colossus to exploit surging credit demand.
With the stock market in such upheaval, boardrooms are leery of making large bets.
"We are unlikely to see a large number of megadeals and buyouts getting done over the next couple of quarters. M&A is hard to do when companies are trading at a 52-week low," said Marc Cooper, chief executive of U.S. advisory firm Solomon Partners.
In the first six months of the year, cross-border transaction volume fell by 25.5 per cent. The usual burst of US investments in Europe did not follow the Russia-Ukraine crisis.
In a period dominated by local dealmaking, Philip Morris International Inc's $16 billion bid for smaller rival Swedish Match was the only noteworthy cross-border exception.
"When you think about the psychology of executives and their level of confidence to make a leap across borders, you need to take into account the level of uncertainty in the world and how that impacts timing," said Andre Kelleners, head of EMEA M&A at Goldman Sachs Group Inc.
Companies' acquisition financing has gotten more expensive as central banks have raised interest rates to combat inflation.
Even those with the funds to complete a transaction - or who are using their shares as currency - find it difficult to agree on a price in stormy markets.
"Stock market volatility is a big headwind to strategic M&A. When you have stock market volatility, it's tough to have value conversations and makes it hard to use stock as currency," said Damien Zoubek, co-head of U.S. corporate practice and M&A at Freshfields Bruckhaus Deringer.
Sharp drops in the value of the euro and the pound in Europe made corporations open to opportunistic overtures from private equity investors.
Buyout funds have been a major engine of global dealmaking, accounting for $674 billion in transactions so far this year, accounting for more than half of total global activity.
"Market dislocation offers a window of opportunity to private equity funds as valuations are coming down," said Umberto Giacometti, co-head of Nomura's EMEA financial sponsors group.
"There is lots of screening work under way on listed companies for both take-private deals and stake acquisitions in public companies. But without a price adjustment, activity cannot properly resume," Giacometti said.
He projected that the average size of private equity acquisitions would fall as banks tightened lending standards and private credit funds were hesitant of signing large checks. more info
Dealmakers expect cross-border deals between the United States and Europe to pick up eventually, owing to a strong currency and a widening valuation difference between U.S. and European corporations.
"With a slightly elevated level of visibility than what we had earlier this year, you could expect capital flows to resume and deal activity to pick up, including on the financing side," said Goldman's Kelleners.
However, firms are still looking to cut relations with Russia or reduce their exposure to the region.
"Clients are increasingly looking inward rather than outward," said Citigroup's Harding-Jones.