Global deal making is entering an arid season as raging inflation and a stock market rout curb the thirst 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 activity in the second quarter.
The value of announced deals dropped 25.5 per cent 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 deal making will come but I don't think it's quite there yet,” said Alison Harding-Jones, Citigroup's M&A head for Europe, Middle East and Africa.
M&A activity in the US plunged 40 per cent to $456 billion in the second quarter, while Asia Pacific was down 10 per cent, Dealogic data showed.
Europe was the only region where M&A activity did not plummet. Activity was up 6.5 per cent in the quarter, largely driven by a frenzy of private equity deals, including a €58bn ($61.07bn) takeover bid for Italian infrastructure group Atlantia.
“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.
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 US advisory firm Solomon Partners.
Cross-border transaction volume dropped 25.5 per cent in the first six months of the year. A traditional flurry of US investments in Europe did not occur after Russia's invasion of Ukraine.
“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.
Acquisition financing has become more expensive for companies as central banks have increased interest rates to fight inflation.
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 US corporate practice and M&A at Freshfields Bruckhaus Deringer.
Citigroup's M&A head for EMEA
In Europe, sharp falls in the value of the euro and the pound made companies vulnerable to opportunistic overtures by private equity investors.
“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 under way on listed companies for both take-private deals and stake acquisitions in public companies. But without a price adjustment, activity cannot properly resume,” Mr 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, deal makers expect cross-border transactions between the US and Europe to pick up eventually, on the back of a strong dollar and a widening gap between the valuation of US 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 Mr Kelleners.
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 Ms Harding-Jones.
