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By Breakingviews
As with often value-destructive mergers and acquisitions, the numbers aren’t adding up for dealmakers. After a record-breaking $5.8 trillion of activity in 2021, they have endured a staggering reversal of fortune. The slump will last through 2023.
Once chief executives and buyout barons recovered from the initial pandemic shock in 2020, they embarked on an epic shopping spree. The following year brought 64% more M&A, according to Refinitiv data, 40% beyond the previous high of $4.1 trillion in 2007, right before the world stared into the financial abyss.
The latest comedown is therefore understandable, especially given higher interest rates, which contributed to a 17% dip in the S&P 500 Index for the year to mid-December. Meanwhile, deal volume tumbled to about $3.5 trillion, 36% down from the same time a year earlier, though it stayed ahead of 2020’s pace. Those numbers also could face at least one significant revision: The year’s biggest transaction, Microsoft’s (MSFT) $69 billion deal for video-game developer Activision Blizzard (ATVI), hangs in the balance after U.S. trustbusters sued to stop it.
Investment bankers are reorienting to the new reality. The emphasis will be on private equity firms seeking to deploy some $800 billion of ageing cash held in buyout funds worldwide as of late November, according to Preqin. Leveraged, the sum could plausibly back some $2 trillion of investment. Private equity firms already accounted for an all-time high of 22% of deal volume in 2022.
Caught with billions of loans that investors no longer want to buy, banks want to clear out their balance sheets before lending again. Buyers and sellers also must adjust to the end of ultra-cheap money. Borrowing costs are up: Debt issued by companies with lower credit ratings yields nearly 9%, roughly double the rate a year earlier, per the ICE BofA Single-B High Yield Index. This financing environment suggests corporate acquirers will use more stock as payment, even as cash-rich industries such as pharmaceuticals can stay active.
Despite hopes of recovery, the acquisition annals portend another tough year for deal advisers, many of whom already are trimming jobs and slashing bonuses. After 2007, M&A volume declined for two years – falling 52% from peak to trough, before rebounding. The same happened after 2015, albeit with a shallower 21% dip. As potentially bleak economic circumstances loom, bankers will be lucky to eke out a repeat of 2022.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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