Dealmakers buckle up as records give way to ruptures in M&A


Six months on from their busiest-ever year, dealmakers are facing the reality that a slowdown in mergers and acquisitions may be more than a temporary blip.

Global M&A values have fallen 17% year-on-year to $2.1 trillion, according to data compiled by Bloomberg. Rampant inflation, hawkish central banks, war in Ukraine and squeezed supply chains have combined to quickly cool the record levels of buying seen in 2021.

Banks are also starting to pull back on lending for big-ticket transactions, choking off financing for private equity firms that fueled the boom. Deals are down across all major regions and most sectors, with an increasing number stalling altogether.

While bankers are keen to point out that activity remains comfortably above historical averages, M&A tends to trail capital markets by a few months — and major equity indexes have been flashing red for a while, with share sales now at a near two-decade low. The hype around special purpose acquisition companies, or SPACs, has also disappeared, blocking another avenue to mergers.

“We know the M&A cycle is always late,” said Oliver Lutkens, co-head of advisory for Europe, the Middle East and Africa at BNP Paribas SA. “Buyers and sellers usually do robust M&A until the economy really turns, because they want to get deals done before it’s too late.”

The pursuit of large, strategic acquisitions is unlikely to be a priority for many company boards in the coming months as they focus on preparing their businesses for the impact of a possible recession. The rising cost of goods that’s hit levels of consumer spending around the world, and a need for certainty on central banks’ response to it, continue to weigh on stock prices and sentiment.

“There is volatility going into the second half,” said Michael Santini, executive chairman of global banking at UBS Group AG. “We are likely setting up for a more active M&A and IPO market in 2023, given the Fed interest-rate hiking cycle could be done as we exit 2022, and we’ll have more visibility on the economic outlook.”

Alongside corporates, private equity buying is also coming off the boil. Buyout firms, whose spending had been trending up year-on-year as recently as May, are all of a sudden finding it harder to secure the leveraged loans required to get big deals done. Walgreens Boots Alliance Inc. this week abandoned a £5 billion ($6.1 billion)-plus sale of the Boots drugstore chain, and Reckitt Benckiser Group Plc is considering shelving a $7 billion sale of its baby formula business. In both cases, private equity suitors had trouble meeting sellers’ high price expectations amid tightening credit markets.

Certain pockets of private capital do continue to place bets, including infrastructure funds chasing assets that promise strong and stable returns amid the volatility. This year, Blackstone Inc. has teamed up with Italy’s billionaire Benetton family on a bid to take highway operator Atlantia SpA private, National Grid has agreed to sell 60% of its £9.6 billion gas transmission business, and bid groups are battling it out for a stake in Deutsche Telekom AG’s 20 billion-euro ($21 billion) towers unit.

“Private equity firms are still finding pockets of private capital and aren’t only relying on very conducive financing markets to pull deals off,” said Lutkens.

As it did throughout the Covid-19 pandemic, the technology sector is still proving fertile ground for dealmaking and has already delivered the year’s two biggest transactions: Microsoft Corp.’s $69 billion purchase of video games maker Activision Blizzard Inc., and semiconductor company Broadcom Inc.’s roughly $61 billion acquisition of cloud-computing provider VMware Inc.

“Corporates are still sitting on record levels of cash so they will be in a position to act on strategic opportunities at more attractive valuations,” said Sameer Singh, co-head of North America M&A at Citigroup Inc. “It is a moment of opportunity for them relative to private equity, given near-term volatility in the financing markets.”

Both the Microsoft and Broadcom transactions helped mark the return of $50 billion-plus megadeals that were notably absent from the record-breaking run of 2021. Also this year, Indian lender HDFC Bank Ltd. announced a $60 billion all-stock merger with the nation’s biggest mortgage financier.

“Some forward-leaning management teams will still pursue deals to move their strategy forward during a recession,” said UBS’s Santini.

To be sure, the stresses in global markets present their own impetus for pursuing M&A for some companies. The need to quickly adapt to changing consumer habits, relocate supply chains or hasten the transition to cleaner forms of energy will all provide rationale for divestments, acquisitions and corporate rejigging.

“Everyone is looking at a new world, thinking about challenges like inflation, energy supply, Ukraine and an economic slowdown,” said Lutkens at BNP Paribas. “They haven’t put their pens down. The priorities are shifting and they’re pivoting to different types of transactions.”

In recent months, autos group Renault SA has outlined a plan to carve out separate electric-vehicle and combustion-engine businesses, drugmaker GSK Plc has moved ahead with a spinoff of its consumer health-care arm and foods giant Kellogg Co. has said it will split into three companies.

“It’s a pretty mixed feeling out there — the market is getting more tepid,” said Eric M. Swedenburg, a Simpson Thacher & Bartlett partner who is co-head of the firm’s M&A practice. “The deal market hasn’t shut down, it’s just more measured.”

© 2022 Bloomberg L.P.

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