Global M&A shrank for the third consecutive quarter as rising interest rates forced lenders to pull back from financing large deals and the soaring dollar failed to spur U.S. companies into snapping up foreign targets amid persisting geopolitical tensions.
A steep fall in large private-equity buyouts contributed to the slowdown in global deal making, with third-quarter activity dropping 54 per cent to US$716.62-billion from US$1.56-trillion in the same period last year, according to Dealogic data.
Deal makers are facing resistance when they pitch deals to their clients as annual volumes have so far lost 33 per cent, with US$2.97-trillion of announced deals this year.
“The backup in the leveraged finance market along with the lengthened timeline of regulatory reviews for many transactions has had an impact on deal making,” said Cary Kochman, global co-head of M&A at Citigroup Inc.
M&A volumes in the United States plunged by nearly 63 per cent in the third quarter to US$255.89-billion as the rising cost of debt forced companies to postpone their pursuit of transformative buyouts.
Plagued by spiralling inflation, European M&A activity suffered a 42-per-cent contraction in the third quarter while Asia-Pacific was down 52 per cent, according to Dealogic.
“In today’s markets, most banks don’t feel comfortable underwriting a financing package of €3- to €4-billion for a private equity deal in Europe,” said Guillermo Baygual, co-head of EMEA M&A at JPMorgan.
“Getting deals done takes much longer. The focus is purely on high-quality assets, especially in resilient industries such as infrastructure,” he said.
Wall Street banks had to stomach a loss of roughly US$700-million linked to the underwriting of the US$16.5-billion leveraged buyout of Citrix.
As the environment for deal making has deteriorated this year, a number of corporate buyers have chosen to walk away from earlier handshake agreements while others have postponed large buyouts altogether.
“I don’t think we’ve hit the bottom yet. Today’s market is just all over the place and people are still a little bit spooked,” said Melissa Sawyer, global head of the M&A group at Sullivan & Cromwell LLP.
Still, some large deals were signed during the quarter.
Notable transactions included Adobe Inc.’s US$20-billion acquisition of design software company Figma and Oak Street’s US$14-billion take-private deal for real estate investment trust Store Capital Corp.
In Britain – where on Sept. 26 the pound plunged to an all-time low against the dollar – Schneider Electric’s £9.5-billion proposed takeover of British software firm Aveva was a rare attempt to revamp activity in Europe’s biggest M&A market.
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.
“Currency dislocation can create opportunism. But if you’re a U.S. buyer you also need to look at the long-term value creation thesis and right now you won’t get any upside from your target’s sterling earnings which have been weakened by the latest currency fluctuations,” said Dwayne Lysaght, co-head of EMEA M&A at JPMorgan.
Corporate confidence in markets being supportive of deal making – widely seen as the leading indicator for M&A activity – has plummeted as a long-lasting recession is looming.
“You have a whole generation of people who haven’t seen interest rates rise this precipitously and no one really knows where it will stop. That could have a huge impact, not just on valuations, but also on the underlying economy,” said Matthew Abbott, global co-chair of the M&A group at Paul, Weiss, Rifkind, Wharton & Garrison LLP.
Going forward deal makers expect more domestic tie-ups, mostly funded by stock, to help companies withstand the storm.
“As a reaction to macroeconomic pressures, some large all-stock mergers will be certainly under consideration as a way to gain efficiencies and tackle sluggish top-line growth and inflation in the cost base. The rationale for deal making will rely on the ability to take out costs and address operational overlap,” said Derek Shakespeare, chairman of EMEA M&A at Deutsche Bank.
Meanwhile, some companies could pursue hostile deals if boardrooms are not willing to play ball.
“On the public M&A side, [pro-active outreaches] may lead to some more aggressive or hostile activity where buyers don’t take no for an answer and decide to go directly to the shareholders,” said Marc-Anthony Hourihan, global M&A co-head at UBS.
Yet deals have to go through a longer gestation period due to increased antitrust scrutiny, especially in sectors such as Big Tech.
Lengthy regulatory reviews have pressured buyers to offer so-called reverse breakup fees they would need to pay if they were unable to consummate the deal.
“Reverse breakup fees are a contractual technique that we’re using to help people overcome their fear of wacky and unpredictable outcomes from the regulators,” said Sawyer of Sullivan & Cromwell.