(BFM Bourse) – Mergers and acquisitions held up well in the first half despite market volatility. However, the trend is likely to slow in the second half of the year as financing costs rise rapidly.
The optimism of business leaders has enabled mergers and acquisitions transactions to resist the market downturn in the first half, but maintaining the pace will be difficult with the slowdown in the economy.
Between January and June, the amount of mergers and acquisitions around the world fell by more than 20% compared to the previous year, a proportion similar to some major stock market indexes, according to the census of the financial data specialist Dealogic stopped at the 28 June. But the year 2021 had shattered all records, in line with the economic rebound initiated in the summer of 2020, after the confinements linked to the coronavirus epidemic. Taking a step back, the amount for the first six months of 2022 is the third highest since 2010. And this, despite economic conditions which have become significantly tighter, with inflation and the economic slowdown observed in the States States and Europe, and the war in Ukraine.
A gap between market sentiment and reality?
There could be a “gap” between the perception of economic players “who, for the most part, confirm to us that they manage somehow to manage the rising costs and the problems of supply chains”, and the markets who themselves “already anticipate a sharp deterioration in the macroeconomic environment in the medium term”, explains Alexandre Courbon, head of mergers and acquisitions at HSBC Continental Europe.
This gap between market and business “is quite pronounced but already seen”, reminds Alexandre Courbon, companies can take several weeks or even months before seeing the effects of a turnaround. After a year 2021 where many of them recorded record profits, they still have room for manoeuvre. “Today, companies tell us: ‘even by putting on belts and suspenders’, we see the year rather positively”, adds Florian Allain, of Mandarine Gestion.
They are also encouraged to act quickly, while the cost of debt will become more substantial with the rises in interest rates on the bond market. Still historically low at the start of 2022, they have since begun a sharp rise, for governments and businesses alike.
Technology, the most active sector
In detail, technology remains, by far, the most active sector and represents more than a quarter of the volumes of mergers and acquisitions according to the accounts of the financial data agency Refinitiv from January to May. Among the cases in progress are the acquisition of Activision Blizzard by Microsoft for 69 billion dollars, announced at the beginning of the year, or that of VMware by Broadcom for 61 billion dollars in May.
But the disconnect between markets and business may be coming to an end. The new market conditions and the additional costs generated by inflation could be seen in the accounts during the results of the first half, mid-July. Thus, the dynamic in technology has slowed down compared to 2021 (-14%), partly explaining the sharp decline observed in the United States (-25%), according to Refinitiv. In Europe, M&A volumes in the first five months of the year remained stable.
A window of opportunity
Many managers and market watchers believe that the outlook for corporate sales and earnings is still overstated. “When confidence is no longer there, people are much more hesitant to make transactions,” notes Jean-Baptiste Charlet, co-head of the investment banking division of Morgan Stanley France. If today, they “want to be opportunistic, they mandate us to be on the lookout, but the reality behind this phenomenon is that the market itself is slowing down”, he continues.
Despite the “headwinds” to come, “mergers and acquisitions will not be stopped for all that”, underlines Alexandre Courbon of HSBC. “Private equity funds will seek to take advantage of the fall in valuation multiples, which are still high on the unlisted today” particularly in the midcaps segment (valuations below 500 million euros). Companies with strong balance sheets “should see this as a window of opportunity and benefit from less competition in the sales process,” he said.
(With AFP)
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