Several Macro Factors Support an M&A Pickup

By Sam Boughedda 

In a note to clients on Friday, BofA analysts said support for broad M&A pick-up may be stymied by macro, but several factors support a pick-up in the US.

“Deal activity has been highest when small caps are cheap vs. large caps (very true today); disruption is also a driver (extreme bifurcation between high & low-growth co’s today) and both small and large cap corporates have ample cash on their balance sheets. But M&A is cyclical, and weak market returns have led to weak deal counts,” wrote the analysts.

The analysts also acknowledged that tightening credit conditions/rising rates are also headwinds, but macro improvement/visibility should open the door to more deals.

“While overall US M&A activity YTD is tracking below ‘21 levels, Health Care (led by Biotech) deals are on pace for a record year since ‘97 and Tech (led by Software) deals are tracking the highest since ‘16. A laggard: Financials, with deals tracking the lowest since ’11. Overall, across US M&A, we’ve seen more take-privates this year, which could offset some of the recent rise in the # of public co’s off two-decade lows,” added the analysts.

The analysts also stated that healthcare and software M&A should continue based on SMID valuations.