Waiting for the Next M&A Wave

Global M&A has been on the decline for at least four quarters now amid a flurry of conditions adverse to dealmaking. But speakers on the S&P Global Market Intelligence “M&A in Focus” webinar on June 28 suggested that M&A will recover and unleash a wave of pent-up demand again—just like it did after a lull driven by the COVID-19 pandemic and lockdowns in 2020.

Lauren Sey, sector editor, U.S. Banks at S&P Global Market Intelligence, cited market uncertainty, rapidly rising interest rates, bank collapses and depressed stock valuations as some of the reasons keeping dealmakers at bay in banking and other industries. “But the good news is that when all of these factors subside…industry observers do expect another massive wave of bank M&A, like we saw in 2021 when both deal value and the number of deals surged,” said Sey, pointing to a presentation slide on deal activity over the last three years.

“I like to compare it to when the M&A environment during COVID was depressed as it is now. And then all that pent-up demand led to a wave in 2021. We’re just waiting for that 2021 wave,” she added, noting that it’s hard to tell when it’ll materialize.

Conditional Requirements

Some of the conditions that would be required for that wave to occur include: less uncertainty, clarity on whether a recession is still coming or not, clarity on credit quality and a stabilization in interest rates. Dealmakers also need “better stock valuations or banks coming to terms with what the current valuations are and there is some slight resetting of expectations,” Sey noted.

Other speakers reiterated the notion that experts had expected M&A to come back in the second half of the year, but that recovery may have been delayed by the regional bank failures in the spring. “During the first quarter earnings calls, investment bank CEOs were saying that they expected to see an M&A recovery in the second half of the year,” said Joe Mantone, news desk manager of Global Financial Institutions at S&P Global Market Intelligence. “But then we saw the bank turmoil in March that put everything on hold and sent shock waves through the financial system and it increased uncertainty. And understandably, everyone hit the pause button as we waited to see the extent of the fallout.”

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Continuously rising interest rates and the cost of debt capital present the biggest challenge to M&A today. In a poll question at the start of the webinar, attendees were asked: What is the biggest impediment to M&A right now? The majority of respondents (64%) answered “rising rates and higher debt cost,” while recession concerns came in second at 21%. The rest of the audience voted for wide bid/ask spreads at 11% and equity prices at 5%.

“We did get a pause in the rate hiking cycle, but we also got a signal that more rate hikes may be on the horizon, so this makes M&A challenging because the financing cost could change between an announcement and the closing of a transaction,” said Mantone. “The possibility of higher rates does hurt deal activity.”

Resilient Investments

Touching on investment activity that has persevered despite the odds, Mantone highlighted restructurings, healthcare investment and some public markets activity. Mantone said investment banks are talking about restructuring activity picking up because of some companies’ debt burdens that might be untenable in the current rate environment: “Many companies are dealing with the higher debt costs with rising rates, maturity walls are a topic of much discussion right now.”

U.S. healthcare deals are some of the few that are still fruitful this year because of successful strategics that can finance deals with stock and cash. “That’s one sector where we’ve seen an increase in the total value of M&A this year. That’s because there’s a lot of cash-rich companies there that have the wherewithal to make deals,” Mantone said.

Related content: Pent-Up M&A Demand Headed for Release

A slight pickup in IPO activity could also be an indicator of an improving M&A market. “The IPO activity is picking up,” he added. “It’s certainly not gangbusters, but we have seen some more activity in the equity capital markets and generally, the capital markets activity picks up before M&A.”

Mantone said that private equity firms are still sitting on large piles of dry powder that’s ready to be deployed, but they’re being cautious. “They’re going to sit on the sidelines until they see good deals,” he said. “They want to provide liquidity to their LPs, but they also don’t want to do bad deals and lose money.”

Anastasia Donde is Middle Market Growth’s senior editor.

Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.