M&A ACTIVITY PLUNGING

After setting a record pace in 2021, the number and value of mergers and acquisitions are at their lowest in five years, excluding 2020 when COVID-related lockdowns slammed the economy shut.

In the U.S. this year, about $1 trillion worth of deals were made through 31 July, Dealogic reported, 40 percent below last year’s level.

Globally, the value is off by 30 percent so far this year, down to $2.4 trillion. In 2021, $6 trillion worth of deals were done around the world.

M&As have fallen victim to market jitters over a gathering global economic slowdown, persistent inflation, the Ukraine war, and U.S.-China tensions, according to The Wall Street Journal.

Also, the U.S. Federal Reserve has raised interest rates from 0.25 percent to 2.5 percent this year, making buyouts and takeovers harder and more expensive to finance. 

Banks have largely suspended lending on buyout deals and lenders have become more cautious generally, the WSJ said.

In addition, special-purpose acquisition companies (SPACs), which raised hundreds of millions of dollars during the COVID era, have crashed, shutting off what had been a steady source of mergers.

We reported on the meteoric rise of SPACs, and their equally meteoric crash, in “SPACs Raise Regulators’ Concerns” (31 Mar 2021), “SPACs Dive Into Junk Bond Market” (27 Apr 2021), “Gamblers Dump SPACs” (8 Jun 2021), “Knives Are Out for SPACs” (24 Aug 2021) and “Goldman Backs Out of SPACs” ( 17 May 2022), among other articles.

Private equity firms also have toned down their activities, announcing only $421.3 billion in deals in the U.S. this year through July, barely half of the $744.8 billion announced during the same period in 2021.

Dealmakers are keeping close watch on the U.S. government’s antitrust activities. Regulators have moved to block Meta’s acquisition of VR firm Within Unlimited and have made comments suggesting tech megafirms should be broken up.

Banks also are taking a beating from the slowed market in M&As.

Many of the richest banks have relied on fees for structuring buyouts and takeovers to shore up their profits as stock trading and IPOs have sagged. The M&A slowdown has choked those revenue streams at the biggest banks in the second quarter, the WSJ noted.

Making matters worse, many of those banks are booking losses on leveraged loans they made before markets turned downward.

The industry is closely watching the sale of $15 billion in debt by various private equity firms that want to buy software company Citrix in a deal valued at $16.5 billion, the WSJ reported.

The deal was supposed to have passed certain milestones over the summer but the deadline has been delayed until Labor Day, giving the M&A market additional concerns.

TREND FORECAST: While there will also be great losses from those companies that overpaid buyouts during the cheap money periods, there is no end to M&A activity in the near future. Although M&A activity will decline further as interest rates move higher, the deeper the economy falls and the lower asset prices fall, the more companies the “Bigs” will buy up… at cheaper prices.