Global merger and acquisition activity (M&A) took a 29% drop in the first quarter of 2022 due to market volatility caused by Russia’s invasion of Ukraine. This slowed down last year’s record-breaking pace of dealmaking.
According to Dealogic data, the overall deal volume fell to $1.01 trillion, from $1.43 trillion during the first quarter of 2021. This was due to a 29% drop of cross-border transactions. Geopolitical tensions caused large companies to halt their pursuit of large strategic buyouts.
Dwayne Lysaght is co-head of EMEA M&A for JPMorgan Chase & Co.
Even though volumes dropped 28%, North America still accounted for more of the first quarter deal activity. Asia Pacific activity fell 33% to $184.2 million.
Volumes in Europe fell 25% to $227.67 Billion
Dealmakers claimed that first-quarter activity was down sharply compared to record-breaking volumes last year, which were difficult to duplicate.
“While execution has been a bit more difficult due to increased volatility and macro worries, that hasn’t stopped new activity,” stated Stephan Feldgoise co-head of global M&A at Goldman Sachs.
The quarter saw major deals including Microsoft’s purchase of Activision Blizzard, a “Call of Duty” maker, for $75 billion. European telecom firms Orange (or MasMovil) also combined their Spanish businesses through a joint venture of 19.6 billion euros ($21.87billion).
Dealmakers claimed that stock market volatility made it more difficult for large companies around the world to purchase smaller competitors through their market capitalization.
“In this momentary dislocation, volatility has greatly affected stock use,” stated Cary Kochman (C.N. ), co-head of global M&A at Citigroup. “This is no longer a frenetic market.”
Despite all the challenges, the overall environment for buyouts is still strong.
“We are taking a glass half full approach – although volumes are down, it still has an impressive pace that looks very similar from 2016 to 2019,” stated Kevin Brunner, co-head of global M&A, Bank of America.
There were 13 transactions exceeding $10 billion, up from 12 in the previous quarter. This indicates that private equity firms and companies did not hesitate to pursue larger deals despite market turmoil.
Private equity buyouts, which account for $204.47 trillion of total volume, remained healthy, despite the fact that debt is still cheap than it was in the past.
Jim Langston, co-head of U.S. M&A for Cleary Gottlieb Steen & Hamilton LLP, stated that “you’re going to continue to see private equity M&A make up a greater portion of the M&A overall as the dry powder-to-deploy remains at record levels.”
As traditional lenders were reluctant to take on higher leverage risks due to uncertain macroeconomic conditions, direct lenders stepped up to assist in the financing of large leveraged buyouts.
“While there is a lot of attention paid to public-to-private transactions, as we have learned over the past 24 months, these types of deals present a greater execution risk and may not go through. Although it is more costly, financing to take companies off of the public markets remains available,” Simona Maellare said, global co-head of UBS’ Alternative Capital Group.
HEALTHCARE SLIPPING
Even though overall volumes were lower than last year, dealmaking in the technology sector continues to be the leader.
Dealmaking in real estate saw a significant jump, with volumes rising 47% as workers around the globe returned to work from home, making it more attractive to buyers.
Healthcare activity, which is a large share of all deals, fell by more than half as large pharma companies took a more cautious approach to manage market volatility due to geopolitical tensions.
While many blue-chip companies tried to exit Russia quickly and avoided using large cash piles to buy out, activist investors increased pressure on boards to sell or dissolve to unlock more value at a time of lower public market valuations.
“Companies from many industries believe their business models need to change drastically in the foreseeable future,” stated Pier Luigi Colizzi (BARC.L. Head of Investment Banking for Continental Europe, Barclays’ and co-head of EMEA M&A.
Dealmakers stated that boards should be cautious in pursuing large-scale transformational deals. They will also need to consider their exposure to commodities and gas prices.
They anticipate that deal activity will pick up once geopolitical tensions have been resolved. However, deals will likely be smaller in scale.
Citi’s Kochman stated that “This is just one moment when I predict that there won’t be an outbreak of $75 trillion-plus transactions.”