Global M&A decreased for the third straight quarter as lenders withdrew from large acquisitions due to rising interest rates, and the strong currency failed to entice American businesses to acquire overseas targets despite ongoing geopolitical tensions.
The slowdown in worldwide dealmaking was mostly caused by a sharp decline in significant private equity buyouts, with third-quarter activity falling by 54% to $716.62 billion from $1.56 trillion at the same time last year, according to Dealogic statistics.
With $2.97 trillion in announced agreements so far this year, annual volumes have fallen by 33%, and dealmakers are encountering opposition when pitching deals to their clients.
According to Cary Kochman, global co-head of M&A at Citigroup Inc., “the backup in the leveraged finance market together with the longer timetable of regulatory assessments for many mergers has had an impact on dealmaking.”
As a result of corporations delaying their pursuit of transformative buyouts due to the rising cost of debt, M&A volumes in the United States fell by over 63% in the third quarter to $255.89 billion.
According to Dealogic, the third quarter saw a 42% decline in European M&A activity and a 52% decline in Asia-Pacific M&A activity due to the continent’s skyrocketing inflation.
According to Guillermo Baygual, co-head of EMEA M&A at JPMorgan, “In today’s markets, most banks don’t feel comfortable underwriting a financing package of 3 to 4 billion euros for a private equity purchase in Europe.”
Deals take a lot longer to complete. The emphasis is solely on high-quality assets, particularly in resilient industries like infrastructure, the expert said.
In connection with the underwriting of Citrix’s $16.5 billion leveraged buyout, Wall Street banks had to take a loss of about $700 million.
Many corporate buyers have opted to withdraw from prior handshake agreements this year as the climate for dealmaking has gotten worse, and some have decided to cancel significant buyouts altogether.
We have not yet reached the bottom, in my opinion. According to Melissa Sawyer, global head of the M&A group at Sullivan & Cromwell LLP, the market is just all over the place today and people are still a little bit frightened.
Even yet, a few sizable agreements were completed throughout the quarter.
Notable deals included Oak Street’s $14 billion take-private deal for real estate investment trust Store Capital Corp. and Adobe Inc.’s $20 billion acquisition of design software business Figma.
The planned buyout of British software company Aveva by Schneider Electric for 9.5 billion pounds was a rare attempt to revive activity in Europe’s largest M&A market in Britain, where on September 26 the pound fell to an all-time low versus the dollar.
Currency misalignment
While valuations are sinking, U.S. buyers have so far taken a cautious stance on doing deals overseas and making currency-driven bets amid concerns over the war in Ukraine and Europe’s energy crisis.
Opportunism can result from currency dislocation. However, if you’re a U.S. buyer, you also need to consider the long-term value creation thesis. At the moment, the recent currency swings have hurt your target’s sterling profits, so you won’t get any upside from that, according to Dwayne Lysaght, co-head of EMEA M&A at JPMorgan.
As a long-lasting recession approaches, corporate trust in markets supporting dealmaking has plunged. This confidence is usually regarded as the leading indication of M&A activity.
“You have an entire generation of individuals who haven’t experienced an increase in interest rates this sharp, and nobody really knows when it will end. That might significantly affect values as well as the underlying economy, according to Matthew Abbott, worldwide co-chair of Paul, Weiss, Rifkind, Wharton & Garrison LLP’s M&A group.
Dealmakers anticipate more domestic alliances in the future, most of which will be financed by stock and help companies weather the storm.
Some sizable all-stock mergers will undoubtedly be taken into consideration as a response to macroeconomic challenges as a strategy to increase efficiency, combat weak top-line growth, and reduce inflation in the cost base. The capacity to save costs and resolve operational overlap will be the basis for dealmaking, according to Derek Shakespeare, chairman of Deutsche Bank’s EMEA M&A.
If boardrooms are unable to cooperate, some companies might attempt hostile transactions in the interim.
According to Marc-Anthony Hourihan, global M&A co-head at UBS, “On the public M&A side, (proactive outreaches) may lead to some more aggressive or hostile activity when purchasers don’t take no for an answer and decide to go directly to the shareholders.”
However, because of increased antitrust scrutiny, particularly in industries like Big Tech, mergers must go through a longer gestation phase.
Buyers have been compelled to offer so-called reverse break-up costs that they would have to pay if they were unable to complete the transaction due to protracted regulatory reviews.
Reverse break-up fees are a contractual tactic that Sullivan & Cromwell’s Sawyer described as “helping people overcome their fear of zany and unpredictable consequences from the regulators.”
