Mon, Dec 26, 2022 page12

• Dealmakers brace for slow recovery in global M&As

  • Reuters, NEW YORK and LONDON
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  Merger and acquisition (M&A) activity globally fell well short of the high-water mark set last year as debt financing markets collapsed and stock market volatility decimated valuations, with dealmakers predicting a slow path to recovery next year.

  The total value of M&A had fallen 37 percent to US$3.66 trillion by Tuesday last week, according to Dealogic data, after hitting an all-time high of US$5.9 trillion last year.

  Investment bankers and deals lawyers said the activity levels of last year were unsustainable and that a correction was inevitable, but blamed macroeconomic uncertainty for hampering several potential tie-ups in the latter half of this year.

  

  An Albertsons grocery store in Glendora, California, is pictured on Oct. 14. Kroger Co agreed to buy rival Albertsons Cos Inc in a deal to combine the two supermarket chains.

  Photo: Reuters

  “Some sellers are still hoping for the price of yesterday and some buyers are still hoping to get the financing of yesterday although these things are no longer available. This is why we have seen less activity,” JPMorgan Chase & Co global M&A cohead Dirk Albersmeier said.

  M&A volumes in the US fell by about 43 percent to US$1.53 trillion, while Europe and Asia-Pacific saw a 27 percent and 30 percent drop respectively, with volumes hovering just above the US$900 billion mark.

  In the fourth quarter of the year, there has been a 56 percent contraction in global M&A to US$641.2 billion, partly caused by a 66 percent drop in private equity activity.

  The financing market for leveraged buyouts seized up this year as central banks raised interest rates, forcing large private equity firms to either write larger equity checks or abandon their takeover ambitions. Private equity-led buyout volumes slumped by 35 percent during the year.

  “We had the twin evils of geopolitical tension and inflation, resulting in rising interest rates rearing their ugly heads, and the two of them together had a really adverse impact on the market,” Evercore Inc chief operating officer Tim LaLonde said.

  However, there is reason for some optimism ahead.

  “Despite the macro and geopolitical environment, well-capitalized strategics are still going to do deals that are important for their long-term business strategy,” Bank of America Corp global M&A cohead Ivan Farman said.

  Even with macroeconomic headwinds, there were 39 deals worth more than US$10 billion announced this year.

  “M&A is the best house in a pretty tough neighborhood in investment banking right now,” said Mark Shafir, cohead of global M&A at Citigroup Inc, which advised on three of the year’s largest transactions, including Broadcom Inc’s US$61 billion takeover of VMWare Inc.

  Bank of America Europe, Middle East and Africa M&A cohead Eamon Brabazon forecast a “subdued” first quarter, but said, “deal volumes will start growing in the second quarter.”

  Kroger Co’s US$25 billion acquisition of Albertsons Cos and Amgen Inc’s US$28 billion buyout of Horizon Therapeutics PLC were the largest deals of the fourth quarter.

  For both, the buyers were able to readily lean on banks for financing as investment grade-rated corporations had easier access to corporate debt to execute large tie-ups.

  “CEOs are feeling a little more positive about the longer term, even though they see rocky days in the short term,” Cravath, Swaine & Moore LLP presiding partner Faiza Saeed said.

  Top rainmakers expect a pickup in cross-border M&A activity.

  “It is likely that we are going to see significant M&A activity in the US this year; not only US companies making acquisitions, but also European and other international buyers making acquisitions in the US,” Sullivan & Cromwell LLP senior M&A partner Frank Aquila said.

  Lorenzo Corte, a global head at Skadden, Arps, Slate, Meagher & Flom LLP’s transactions practices in London, said dealmaking in the energy industry is expected to pick up due to the war in Ukraine as “Europe has to replace an enormous amount of energy that came from Russia with alternative sources.”

  Several mega-deals worth tens of billions of US dollars fell apart this year as market volatility and a tougher antitrust climate gave companies pause.

  “I characterize 2022 as the great deceleration, from running well above trend to well below,” PJT Partners Inc founder Paul Taubman said. “The reality is [that] deals can still get done. But the bar has been raised on difficulty, which just means that you’re seeing far fewer pencils out than you would have previously.”

  Banks, which backed several sponsor-led buyouts before the markets choked up, were faced with hefty losses on debt they failed to sell to investors.

  Going forward, private equity funds are expected to kick-start the recovery as they seek assets at a discount.

  “Despite the challenges of raising acquisition financing, private equity funds remain confident as they are sitting on a lot of dry powder and the market is coming to them,” said Alvaro Membrillera, head of the London office at Paul, Weiss, Rifkind, Wharton & Garrison LLP. “But before taking action they want to see the real impact of the recession.”

  As geopolitical and economic uncertainty persists, deal activity in early next year might mirror the latter half of this year.

  “If you flash back to a year ago, none of us probably would have predicted the market sell-off to quite the degree that it happened. We were probably more optimistic a year ago,” Wells Fargo & Co M&A global head David DeNunzio said.

  Still, most dealmakers struck a positive note as they prepare for next year.

  “The increased interest rates and the specter of an economic slowdown do make you look at the base case for companies with a finer lens,” Mizuho Americas LLC investment and corporate banking head Michal Katz said. “But we are very much open for business.”
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