Global transactions are entering a barren season as fierce inflation and a stock market rate 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 imminent dealt a blow to mergers and acquisitions (M&A) in the second quarter.
According to Dealogic data, the value of announced transactions fell by 25.5 percent year-on-year to $ 1 trillion.
“Companies are lagging behind M&A in the short term as they are more focused on the impact of a recession on their business. The timing for transactions will come, but I do not think it’s quite there yet,” says Alison Harding – Jones, Citigroup Inc’s EMEA M&A chief.
M&A activity in the United States fell 40 percent to $ 456 billion in the second quarter, while Asia-Pacific fell 10 percent, Dealogic data showed.
Europe was the only region where transactions did not collapse. Activity rose 6.5 percent in the quarter, largely driven by a frenzy of private equity transactions, including a 58 billion-euro takeover bid for Italian infrastructure group Atlantia.
“We are nervous about the back half of the year, but transactions are still taking place,” said Mark Shafir, global co-head of M&A at Citigroup.
With the ongoing turmoil in the stock market, boardrooms are wary of making expensive bets.
“We are unlikely to make a large number of megatransactions and buyouts over the next few quarters. M&A is difficult to do when companies are trading at a 52-week low,” said Marc Cooper, CEO of US consulting firm Solomon Partners.
Cross-border transaction volume fell by 25.5 percent in the first six months of the year. A traditional wave of US investment in Europe did not occur in the aftermath of the Russia-Ukraine conflict.
“When you think about the psychology of managers and their level of confidence to make a leap across borders, you have to consider the level of uncertainty in the world and how it affects timing,” says Andre Kelleners, Head of EMEA M&A by Goldman Sachs Group Inc.
Acquisition financing has become more expensive for companies as central banks raise interest rates to fight inflation.
Even those who have the cash to enter into a transaction or use their shares as currency find it difficult to agree on price in turbulent markets.
“Stock market volatility is a big headwind for strategic M&A. When you have stock market volatility, it’s difficult to conduct value discussions and makes it difficult to use stock as currency,” says Damien Zoubek, co-head of US corporate practice and M&A at Freshfields Bruckhaus Deringer .
In Europe, sharp declines in the value of the euro and the pound have made companies vulnerable to opportunistic decisions by private equity investors.
“Market disruption provides a window of opportunity for private equity funds as valuations fall,” said Umberto Giacometti, co-head of Nomura’s EMEA financial sponsorship group.
“There is a lot of selection work going on on listed companies for both private transactions and acquisitions in public companies. But without a price adjustment, activity can not be resumed properly,” Mr Giacometti said.
He predicted that the average size of private equity transactions would shrink as banks closed the taps on financing and private credit funds became wary of signing large checks.
From now on, transaction makers expect that cross-border transactions between the United States and Europe will eventually increase, on the back of a strong dollar and a larger gap between the valuation of American and European companies.
“With a slightly increased level of visibility than we had earlier this year, you can expect capital flows to resume and pick up transaction activity, including on the financing side,” said Goldman’s Mr Kelleners.
But caution prevails as companies continue to seek to sever their ties with Russia or limit their exposure to the region.
“Customers are increasingly looking inward rather than outward,” says Citigroup’s Mr Harding-Jones.