Is M&A Activity Actually Slowing?

Have heard a lot of anecdotal data points on M&A activity declining, citing entering a recession and general market uncertainty as the primary drivers. 

At my firm, the economy has no impact on the number of deals we look to close, so I haven't noticed any change. 

Talked to my friends in banking and am getting very mixed reviews, some are still grinding as bad as they were during mid-2021 and others have reported their number of new deals / pitches dropping considerably. My initial thought is that many PE firms are looking to exit their higher beta businesses, so it is very industry-specific. 

Would be interested in the perspective of some of the other folks on WSO, specifically some of the more senior guys / girls who can speak to how deal volume trends at the beginning / middle of a recession. From what I understand, deal volume plummeted in 2008, and with a drastic correction coming, I think this is in the back of most of our minds. 

Further, how will this affect valuations? I could see it going both ways for successful companies: 

  1. High performance companies are still selling for considerably less due to general M&A multiples declining. PE funds are more cautious in their investments and less IOIs are submitted, lowering competition, and thus the winning bid. 

  2. Auction processes get considerably more competitive as a large pool focuses on an ever-shrinking number of companies performing well. In other words, when the economy is hot (e.g., last two years) every company under the sun was showing stronger margins, but during an economic downturn it becomes much more challenging, resulting in less companies looking to sell. With the same (or slightly reduced) level of demand and a materially smaller supply of solid targets, valuations could rise as each party looks to place a completive bid. 

Comments (14)

Jun 30, 2022 - 3:05am
whartoncoomer, what's your opinion? Comment below:

Capital markets activity in tier 2 economies has gone to shit, but China is killing it this quarter. HK bankers are working around the clock lately, myself included.

  • Analyst 2 in IB - Cov
Jun 30, 2022 - 4:36am

Dude really? I also work the HK markets. Isn't the IPO market dead? Has been for H1. Or you are talking specifically for M&A

  • Analyst 1 in IB - Gen
Jun 30, 2022 - 7:02am

Yes. Especially on the sellside, we're having a lot of conversations where we need to tell the seller "look, public markets in the sector are down 20-70% vs. our pitch [] months ago, we would likely need to decrease valuation expectations" to which they reply "we would rather wait 18 months so it comes back up"

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  • Associate 2 in IB-M&A
Jun 30, 2022 - 7:35am

I already see less buyers in processes' participating with the buyers not entering the process citing the economic outlook. In addition, PE's reliant on bank financing now can not always get the amount of leverage they would've wanted to get to finance deals.

In terms of deal volume I haven't seen a big decline, but I do see a big decline in terms of high quality assets coming up for sale (lot's of opportunistic sellers now that want to see if they can still catch a good multiple for their B-grade business). So for us no decline in workload for now, but when all the good assets have dried up it should start to get more quiet (or you would have to want to spend time working on the crappier assets). 

Jun 30, 2022 - 6:47pm
PF_Leverage, what's your opinion? Comment below:

Playing off this how are LevFin market people feeling? I get the sense no one is really looking at a ton of bridge/underwritten financing as Sponsors don't want to deals at these financing rates and banks starting to get squeamish on existing books. Bank deals still seem to be getting done fairly normal course. Is anyone's credit department being aggressive or more optimistic? I was hoping PE would be doing more take privateouts with bigger equity checks to keep flow going but doesnt seem to be the case (unless ton of stuff being worked on the background)

My hope is we get a Fed Pivot / market turnaround by September and we see a more robust deal environment. Aided by both M&A and people being opportunistic to just lock in financing needs or push maturities with a market bounce. I fear a slow Q4 would lead to layoffs/bonus's disappearing. Curious on peoples thoughts / pipeline view.

It feels like Middle Market M&A still active but larger corp / sponsor activity anemic. Would be curious on direct lending side as well.

  • Associate 1 in PE - LBOs
Jun 30, 2022 - 9:30pm

Syndicated LevFin is on life support. Every deal going to market is blowing through caps - banks losing money left and right and increasingly risk-off. PE has to accept lower leverage or rely on direct lenders. There's $50bn of underwritten debt that has to come to market this year between Twitter, Nielsen, Citrix, Tenneco, a few others and it's not looking pretty. 

Similar dynamic in DCM in terms of direct vs syndicated as we see in ECM via private markets (still active) vs IPO (dead). 

Source: in the trenches @ FSG

  • Analyst 1 in IB - Cov
Jul 1, 2022 - 12:09pm

Heard dealflow has dropped quite a bit compared to 2021 in same quarter

Jul 6, 2022 - 2:41pm
TimesNewMoney, what's your opinion? Comment below:

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