Global M&A braces for dry spell as companies put expansion on hold

LONDON/NEW YORK (REUTERS) – Global dealmaking is entering an arid season as raging inflation and a stock market rout 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 looming dealt a blow to merger and acquisition (M&A) activity in the second quarter.

The value of announced deals dropped 25.5 per cent year-on-year to US$1 trillion (S$1.39 trillion), according to Dealogic data.

M&A activity in the United States plunged 40 per cent to US$456 billion in the second quarter, while Asia-Pacific was down 10 per cent, Dealogic data showed.

Europe was the only region where dealmaking did not crash. Activity was up 6.5 per cent in the quarter, largely driven by a frenzy of private equity deals.

“We are nervous about the back half of the year but transactions are still happening,” said Mr Mark Shafir, global co-head of M&A at Citigroup.

With the stock market facing persistent turmoil, boardrooms are wary of making expensive bets.

“We are unlikely to see a large number of megadeals and buyouts getting done over the next couple of quarters. M&A is hard to do when companies are trading at a 52-week low,” said Mr Marc Cooper, chief executive of US advisory firm Solomon Partners.

Cross-border transaction volume dropped 25.5 per cent in the first six months of the year. A traditional flurry of US investments in Europe did not occur in the wake of the Russia-Ukraine conflict.

“When you think about the psychology of executives and their level of confidence to make a leap across borders, you need to take into account the level of uncertainty in the world and how that impacts timing,” said Mr Andre Kelleners, head of EMEA M&A at Goldman Sachs.

Debt conundrum

Acquisition financing has become more expensive for companies as central banks have hiked interest rates to fight inflation.

Even those that have the cash to undertake a deal or are using their shares as currency find it hard to agree on price in choppy markets.

“Stock market volatility is a big headwind to strategic M&A. When you have stock market volatility, it’s tough to have value conversations and makes it hard to use stock as currency,” said Mr Damien Zoubek, co-head of US corporate practice and M&A at Freshfields Bruckhaus Deringer.