Dry spell ahead for global M&A as companies put expansion on hold 6/27/22, 9:37 AM

Dry spell ahead for global M&A as

companies put expansion on hold
Global dealmaking is entering an arid season as raging inflation and a
stock market rout curb the appetite of many corporate boards to expand
through acquisitions.

Russia’s invasion of Ukraine in February and fears that an economic

recession is looming dealt a blow to merger and acquisition (M&A) activity
in the second quarter.

The value of announced deals dropped 25.5% year-on-year to $1 trillion,

according to Dealogic data.

“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 EMEA M&A head.

M&A activity in the United States plunged 40% to $456 billion in the
second quarter, while Asia Pacific was down 10%, Dealogic data showed.

Europe was the only region where dealmaking didn’t crash. Activity was
up 6.5% in the quarter, largely driven by a frenzy of private equity deals,
including a 58 billion euro ($61 billion) take-private bid by the Benetton
family and U.S. buyout fund Blackstone for Italian infrastructure group
Atlantia.

Proceeds from global listings were down 84% to $33 billion in the second
quarter, according to Dealogic, with only 274 companies attempting to
raise cash via an initial public offering (IPO) compared to 852 in the same
quarter last year.

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Dry spell ahead for global M&A as companies put expansion on hold 6/27/22, 9:37 AM

“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.

The largest deal of the quarter was Broadcom Inc’s $61-billion cash-and-
stock buyout of VMWare Inc in the United States.

Others included Elon Musk’s proposed acquisition of Twitter for $44

billion and a move by India’s largest private lender HDFC Bank to buy out
its biggest shareholder in a $40 billion deal to create a financial services
titan to tap rising demand for credit.

With stock markets facing persistent turmoil, boardrooms are wary of

making expensive 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.

Cross-border transaction volume dropped 25.5% in the first six months of

the year. A traditional flurry of U.S. investments in Europe did not occur in
the wake of the Russia-Ukraine conflict.

Philip Morris International Inc’s $16 billion bid for smaller rival Swedish
Match was the only notable cross-border exception in a quarter
dominated by domestic dealmaking.

“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.

Acquisition financing has become more expensive for companies as

central banks have hiked interest rates to fight inflation.

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Even those that have the cash to undertake a deal – or are using their
shares as currency – find it hard to agree on price in choppy 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.

In Europe, sharp falls in the value of the euro and the pound made
companies vulnerable to opportunistic overtures by private equity
investors.

Buyout funds have been a major driver of global dealmaking, generating

transactions worth $674 billion so far this year.

“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 underway 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 predicted the average size of private equity deals will shrink as banks
close the taps on financing and private credit funds become wary of
signing big checks.

Going forward, dealmakers expect cross-border transactions between the

United States and Europe to pick up eventually, on the back of a strong
dollar and a widening gap between the valuation of U.S. and European
companies.

“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.

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Dry spell ahead for global M&A as companies put expansion on hold 6/27/22, 9:37 AM

But caution prevails as companies are still seeking to sever their ties with
Russia or limit their exposure to the region.

“Clients are increasingly looking inward rather than outward,” said

Citigroup’s Harding-Jones.

Reuters

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