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 global co-head of M&A at Citigroup Inc., Cary Kochman, the backup in the unsecured finance market together with the longer timetable of regulatory assessments for many mergers has had an impact on dealmaking. As a result of companies delaying their pursuit of transformational buyouts due to the rising cost of debt, M&A volumes in the United States fell by over 63% in the 3rd 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.
As per Guillermo Baygual, co-head of EMEA M&A at JPMorgan, in today’s marketplace, most banks don’t feel confident underwriting a financing bundle of 3 to 4 billion euros for a private equity purchase in Europe.
Deals take much longer to complete. Purely high-quality assets are the focus, particularly in durable businesses like infrastructure, he said.
Wall Street banks were forced to bear a loss of about $700 million connected to the underwriting of Citrix’s $16.5 billion leveraged buyout. Corporate buyers have opted to withdraw from previous handshake agreements as the climate for dealmaking has been worse this year, while others have decided to put off completing significant buyouts.
They haven’t reached the bottom, in her opinion. People are still a little frightened because of how chaotic the market is today, Sullivan & Cromwell LLP’s worldwide head of the M&A group, Melissa Sawyer, said.
Even In Britain, the pound hit an all-time low against the dollar on September 26. Schneider Electric’s plan to buy British software company Aveva for 9.5 billion pounds was an unusual way for Europe’s largest M&A market to get going again. A few sizable agreements were completed throughout the quarter. Notable deals included Oak Street’s $14 billion takeover of real estate investment trust Store Capital Corp. by Adobe Inc. and its $20 billion takeover of design software provider Figma.
In Britain, where the pound hit an all-time low versus the dollar on September 26, Schneider Electric’s proposed acquisition of British software company Aveva for 9.5 billion pounds was an unusual attempt to revive activity in Europe’s largest M&A market.
Despite declining valuations, U.S. buyers have so far refrained from entering into international agreements and betting on currencies due to worries about the conflict in Ukraine and Europe’s energy problems.
Opportunism may result from a currency disruption. However, as a U.S. buyer, one also needs to consider the long-term wealth creation thesis, and at the moment, the recent currency movements have hurt the target’s sterling profits, so they won’t see any gains from them, affirmed co-head of JPMorgan’s EMEA M&A, Dwayne Lysaght. As a long-lasting recession approaches, corporate trust in markets supporting dealmaking has plunged. This confidence is usually regarded as the leading indication for M&A activity.
There is an entire generation of individuals who haven’t experienced an increase in interest rates this sharp, and nobody really knows when it will stop. That may have a significant influence on valuations as well as the underlying economy, Matthew Abbott, worldwide co-chair of Paul, Weiss, Rifkind, Wharton & Garrison LLP’s M&A group, said. Dealmakers anticipate more domestic alliances in the future, most of which will be financed by stock and help companies weather the storm.
Large all-stock mergers will undoubtedly be taken into consideration as a response to macroeconomic challenges as a strategy to increase efficiencies, combat weak top-line growth, and reduce inflation in the cost base. Dealmaking will be justified by the capacity to save costs and address operational duplication, Derek Shakespeare, head of EMEA M&A at Deutsche Bank, stated.
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 open M&A side, (preemptive outreach efforts) may lead to some more aggressive or hostile activity when purchasers do not even take no for an answer and choose to go straight to the shareholders.
However, because of increased antitrust scrutiny, particularly in industries like Big Tech, mergers must go through a longer gestational phase. Buyers have been compelled to offer so-called inverse 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 legal tactic that Sullivan & Cromwell’s Sawyer described as helping individuals overcome their fear of quirky and unpredictable consequences from the regulators.
