Market mayhem triggers deal-making drought
Lack of clarity about direction of economy and markets has put damper on M&A
Merger activity has slowed dramatically after a record year in 2021, and some deal makers are bracing for an even quieter second half.
In the U.S., about $1 trillion of deals had been struck in 2022 through late July, according to Dealogic. That is the lowest in five years—excluding 2020, when deal making ground to a halt at the outset of the pandemic—and a nearly 40% drop from the same period in 2021. Globally, some $2.4 trillion of deals were announced, representing a roughly 30% decrease. The total number of transactions also was down.
Driving the decline is the No. 1 enemy of deal making: lack of clarity about the direction of the economy and markets, as inflation rises and war rages in Ukraine. Higher interest rates have raised the cost of financing deals and made buyout loans harder to come by. The end of a boom in deals involving special-purpose acquisition companies also has taken a toll on merger activity.
“Uncertainty is never helpful for M&A," said Anu Aiyengar, global co-head of mergers and acquisitions at JPMorgan Chase & Co.
She expects deal activity in the second half of this year to be lower than the first half, due in part to the war and the fact that “private-equity, which has been a significant driver of the overall market, seems to be a little bit more on the sidelines."
The slowdown punctuates a busy year for deals. Last year, nearly $6 trillion of transactions were struck globally, almost half of that in the U.S., as cheap debt, free-flowing government stimulus and looming tax changes spurred a shopping spree for acquirers.
Some of that momentum continued in 2022, with megadeals such as Microsoft Corp.’s agreement to acquire videogame publisher Activision Blizzard Inc. for about $75 billion; Broadcom Inc.’s proposed $61 billion acquisition of cloud-computing company VMware Inc.; and Elon Musk’s $44 billion proposed purchase of Twitter Inc., which he is now seeking to terminate.
And although slower this year, activity continues. Last week, JetBlue Airways Corp. agreed to buy Spirit Airlines Inc. for $3.8 billion, wresting it from a prior suitor. Also in July, Amazon.com Inc. agreed to purchase 1Life Healthcare Inc., which operates primary-care practices under the One Medical name. A deal valued at roughly $40 billion or more by Merck & Co. to acquire biotech Seagen Inc. is brewing.
Still, there has been a meaningful slowdown in the past several weeks, according to Mark Sorrell, a co-head of global M&A at Goldman Sachs Group Inc. He said that without a functioning financing market for large-scale deals, volume is likely to remain muted. “The No. 1 thing we’re focused on is the financing markets getting back into their rhythm," he said.
Earlier this summer, Kohl’s Corp. and Walgreens Boots Alliance Inc. ended strategic reviews without striking deals, with both citing challenges in the financing market.
Many leveraged buyouts considered by private-equity firms have been temporarily shelved because of difficulties in the financing market, as banks have largely paused lending and direct lenders have become more cautious, according to the firms and their advisers.
Private-equity deal activity has dropped dramatically. As of late July, companies had announced $421.3 billion of deals in the U.S., including purchases and sales, compared with $744.8 billion in the same period last year, according to Dealogic.
Another factor tripping up deal making is fear of a tougher antitrust regime in Washington, stoked by moves to block combinations such as Meta Platforms Inc.’s acquisition of virtual-reality company Within Unlimited Inc.
“Boards and CEOs think long and hard before committing to a significant acquisition that might be tied up in the regulatory approval process for 18 months," said Frank Aquila, senior M&A partner at Sullivan & Cromwell LLP. “We continue to see clients looking to do significant, transformative transactions and expect to see many such deals move forward between now and the end of the year."
There is a lot at stake for banks, which derive big chunks of revenue from helping put deals together and reaped big rewards last year. Investment-banking revenue fell sharply at the biggest firms in the second quarter, and some are facing big losses on leveraged loans they agreed to finance before markets soured.
Deal makers are closely watching the sale of debt for the largest U.S. private-equity buyout of the year, of Citrix Systems Inc. The deal included some $15 billion of debt, some of which was expected to be split up and sold off this summer. That timeline has been pushed back to after Labor Day, according to people familiar with the matter.
There are reasons for hope that at some point activity will rebound. Goldman’s Mr. Sorrell said that “just under the surface," work is still being done on possible take-privates, different spinouts or divestitures and straight corporate acquisitions. He said that once financing markets rebound, deal making could come back quickly.
“It’s quite possible we see at some point in the second half a very steep recovery," Mr. Sorrell said. “The degree of client dialogue and desire to do things if the conditions are in the right place is actually very strong and very consistent."
