Pamela Barbaria and Anilban Sen
LONDON/NEW YORK (Reuters) – Global trading is entering a dry season as inflation and a slump in the stock market dampen the desire of many corporate boards to expand their businesses through acquisitions.
Russia’s invasion of Ukraine in February and fears of a looming recession took a toll on mergers and acquisitions (M&A) activity in the second quarter.
The value of announced deals fell 25.5% year over year to $1 trillion, according to Dealogic.
“Companies are pulling out of M&A in the short term because they are more concerned about the impact of the recession on their businesses. The time for deals will come, but I don’t think they are fully ripe yet,” said Alison Harding-Jones, Citigroup Head of EMEA M&A at Inc (NYSE:).
Mergers and acquisitions in the U.S. plunged 40 percent to $456 billion in the second quarter, while the Asia-Pacific region fell 10 percent, Dealogic data showed.
Europe is the only region where the deal has not collapsed. Activity in the quarter rose 6.5%, driven largely by a boom in private equity deals, including the €58 billion acquisition of Italian infrastructure group Atlantia.
“We’re nervous about the second half, but deals are still happening,” said Mark Shafir, Citigroup’s global co-head of mergers and acquisitions.
Boards are wary of making expensive bets as the stock market faces continued volatility.
Marc Cooper, chief executive of U.S. consulting firm Solomon, said: “It is unlikely that we will see a large number of large deals and acquisitions completed in the next few quarters. When companies are trading at 52-week lows, M&A is difficult.” Partners.
Cross-border transaction volumes fell 25.5% in the first six months of the year. In the wake of the Russia-Ukraine conflict, traditional U.S. investments in Europe have not emerged.
“When you consider the psychology of executives and their level of confidence across borders, you need to consider the level of uncertainty in the world and how that affects timing,” said Andre Kellerers, head of mergers and acquisitions for EMEA. Goldman Sachs Group Corporation (NYSE: ).
Acquisition financing for businesses has become more expensive as central banks raise interest rates to fight inflation.
Even those with cash to trade or use their stocks as currency have a hard time agreeing on a price in choppy markets.
“Stock market volatility is a big drag on strategic M&A. When you have stock market volatility, it’s hard to have value conversations and it’s hard to use stocks as a currency,” said Damien Zoubek, co-head of U.S. corporate business and M&A. Freshfields Bruckhaus Deringer.
In Europe, the sharp depreciation of the euro and sterling has left companies vulnerable to opportunistic proposals from private equity investors.
“With valuations falling, market dislocations present a window of opportunity for private equity funds,” said Umberto Giacometti, co-head of Nomura’s EMEA Financial Sponsors Group.
“There is a lot of screening going on for going-private deals and buying stakes in public companies. But without price adjustments, activity cannot resume normally,” Giacometti said.
He predicts that the average size of private equity deals will shrink as banks close funding channels and private credit funds are wary of signing large checks.
Looking ahead, dealmakers expect cross-border deals between the U.S. and Europe to eventually pick up as the U.S. dollar strengthens and the valuation gap between European and American companies widens.
“With visibility slightly higher than earlier in the year, you can expect capital flows to resume and deal activity to pick up, including on fundraising,” Goldman’s Kelenas said.
But caution prevailed as companies were still looking to cut ties with Russia or limit their operations in the region.
“Clients are increasingly looking inward rather than outward,” said Citigroup’s Harding-Jones.