Global mergers and acquisitions (M&A) activity shrank to its lowest level in more than a decade in the first quarter of 2023, as rising interest rates, high inflation and fears of a recession soured the appetite of companies for dealmaking.
M&A volumes during the first quarter slumped 48% to $575.1 billion as of March 30, compared to $1.1 trillion during the same period last year, according to data from Dealogic.
A banking crisis that started in the United States this month with Silicon Valley Bank and spread to Europe with the Swiss government-orchestrated sale of Credit Suisse Group AG (CSGN.S) to UBS Group AG (UBSG.S) roiled markets and stopped many deals in their tracks, investment bankers and lawyers said.
“The first quarter had extraordinary levels of volatility and uncertainty – more than expected going into the year. And that has the impact of postponing some announcements,” said Anu Aiyengar, global head of M&A at JPMorgan Chase & Co (JPM.N).
M&A volumes dropped 44% to $282.7 billion in the U.S. and 70% to $81.87 billion in Europe. Deal volumes in Asia Pacific fell 29% to $176.1 billion.
“Having a well-functioning financing market is a critical ingredient for M&A. Market volatility has clearly been a challenge and weighed on deal volumes in the quarter,” said Brian Haufrect, co-head of M&A for Americas at Goldman Sachs Group (GS.N).
In the absence of debt financing, private equity firms were forced to write larger equity checks for their deals.
“If this negative debt financing environment continues for a few years, people may come to regret having over-equitized deals at the start. But if you have some confidence that in the next 12-18 months the financing market will improve and interest rates will come down, it’s still a great time to transact now,” said Daniel Wolf, partner at Kirkland & Ellis.
The total number of deals worth over $10 billion fell by a big margin from last year, as the appetite for large strategic tie-ups evaporated amid a tougher antitrust environment and macroeconomic uncertainty.
“The first quarter played out the way we thought it was going to, with the exception of the banking crisis, which is the last thing we needed,” said Damien Zoubek, co-head of U.S. M&A at Freshfields Bruckhaus Deringer.
Major transactions during the quarter included Pfizer Inc’s (PFE.N) $43 billion acquisitions of cancer biotech Seagen (SGEN.O), a Silver Lake-led consortium’s $12.5 billion deal for software maker Qualtrics International Inc (XM.O), and CVS Health Corp’s (CVS.N) $10.6 billion takeover of primary care provider Oak Street Health Inc.
“Well-capitalized buyers are able to borrow money to do deals. I don’t see a glacial freeze ahead of us,” said Adam Emmerich, a corporate partner at Wachtell, Lipton, Rosen & Katz.
Kevin Brunner, co-head of global M&A at Bank of America (BAC.N), echoed the optimistic sentiment. He pointed to some large companies taking advantage of depressed valuations to launch “bear hugs” and hostile takeover bids.
“There will be some opportunities for this pent up demand in M&A to benefit from lower volatility and a clearer outlook as to where we’re headed,” Brunner said.
LACK OF CONFIDENCE
The depressed market valuations also presented an opportunity for prominent activist investors to launch new proxy fights, with dealmakers anticipating a boost to M&A volumes from activist campaigns in the coming quarters.
“There are a lot of companies which have components that activists like in terms of non-core assets that can be sold or spun off, or the accumulation of cash that could be deployed in a better way, including through stock buybacks. So, all that is leading to more activism,” said Krishna Veeraraghavan, partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP.
Investment-grade financing markets were a relatively bright spot during the quarter, as corporates were able to line up financing for deals and outbid large buyout firms on some high-profile auctions.
“On the corporate side, if you are an investment-grade credit, the markets have been very strong and supportive. While you may have less interest from sponsors, you have got more interest from corporates who have been outbid over the last couple of years by the sponsor community,” said Barry Weir, co-head of EMEA M&A at Citigroup (C.N).
It could be a while before the fundamentals become favorable for dealmaking again, said Jim Langston, co-head of U.S. M&A at Cleary Gottlieb Steen & Hamilton LLP.
“Inflationary pressures aren’t subsiding as fast as people expected; there’s still a lot of geopolitical tensions, and in a lot of ways, the disruption in the financing market is intensifying,” Langston said.
