Global deals are entering a dry season as runaway inflation and a stock market rout dampen the thirst of many corporate boards to grow through acquisitions.
Russia’s invasion of Ukraine in February and fears of an impending economic recession took a toll on mergers and acquisitions (M&A) in the second quarter.
The value of announced deals fell 25.5% year-on-year to $1 trillion, according to Dealogic data.
“Companies are taking a step back from M&A in the short term as they focus more on the impact of a recession on their business. The time to do deals will come, but I don’t think it’s yet. right there,” Alison Harding said. -Jones, head of EMEA mergers and acquisitions at Citigroup Inc.
M&A activity in the United States fell 40% to $456 billion in the second quarter, while Asia-Pacific fell 10%, according to Dealogic data.
Europe was the only region where dealmaking did not collapse. Activity rose 6.5% in the quarter, largely on a frenzy of private equity deals, including a €58 billion takeover bid for the Italian infrastructure group Atlantica.
“We’re nervous about the second half of the year, but deals are still ongoing,” said Mark Shafir, global co-head of mergers and acquisitions at Citigroup.
As the stock market faces continued turmoil, corporate boards are hesitant to make expensive bets.
“We are unlikely to see a lot of mega-deals and takeovers happening over the next two quarters. Mergers and acquisitions are hard to do when companies are trading at a 52-week low,” Marc Cooper said. , managing director of the American consulting firm Solomon. The partners.
The volume of cross-border transactions fell by 25.5% in the first six months of the year. A traditional wave of US investment in Europe did not occur as a result of the Russian-Ukrainian conflict.
“When you think about the psychology of executives and their level of confidence to cross borders, you have to consider the level of uncertainty in the world and its impact on timing,” said Andre Kellers, head of mergers and EMEA acquisitions at Goldman Sachs Group Inc.
The debt conundrum
Financing acquisitions has become more expensive for companies as central banks have raised interest rates to fight inflation.
Even those who have the cash to undertake a transaction or who use their shares as a bargaining chip find it difficult to agree on the price in choppy markets.
“Stock market volatility is a major impediment to strategic mergers and acquisitions. When you have equity market volatility, it’s hard to have conversations about value and it’s hard to use stocks as your currency,” said Damien Zoubek, co-head of US corporate and mergers practice. and acquisitions at Freshfields Bruckhaus Deringer.
In Europe, the sharp drops in the value of the euro and the pound have made companies vulnerable to opportunistic overtures from private investors.
“The market dislocation provides a window of opportunity for private equity funds as valuations fall,” said Umberto Giacometti, co-head of Nomura’s EMEA Financial Sponsors Group.
“There is a lot of screening work going on on listed companies for privatization deals and equity investments in state-owned companies. But without price adjustments, activity cannot resume properly,” Mr. Giacometti.
He predicted that the average size of private equity deals will shrink as banks turn off the funding taps and private credit funds become wary of writing big checks.
Going forward, traders expect cross-border transactions between the United States and Europe to resume eventually, thanks to a strong dollar and a widening gap between the valuation of American and European companies.
“With a slightly higher level of visibility than we had earlier this year, you can expect capital flows to pick up and deal activity to pick up, including on the funding side,” Mr. Goldman Kellers.
But caution prevails as companies are still looking to sever ties with Russia or limit their exposure to the region.
“Customers are increasingly looking inward rather than outward,” said Citigroup’s Mr. Harding-Jones.