Global M&A braces for a dry spell as boardrooms suspend expansion

* Second-quarter mergers and acquisitions down 25.5% amid recession fears

* Interest rate hikes drive U.S. transactions down 40%

* Asia-Pacific sinks 10%, Europe up 6% on major buyouts

* Funding drought, key impediments to valuation mismatches (adds chart, private equity data)

LONDON/NEW YORK, June 24 (Reuters) – Global deals enter a dry season as runaway inflation and a stock market rout dampen many boardrooms’ appetite to grow through acquisitions .

Russia’s invasion of Ukraine in February and fears of an impending economic recession took a toll on mergers and acquisitions (M&A) in the second quarter.

The value of announced deals fell 25.5% year-on-year to $1 trillion, according to Dealogic data.

“Companies are taking a step back from short-term M&A as they focus more on the impact of a recession on their business. The time to do deals will come, but I don’t think it’s yet. right there,” said Alison Harding-Jones, Head of Mergers & Acquisitions EMEA, Citigroup Inc.

M&A activity in the United States plunged 40% to $456 billion in the second quarter, while Asia-Pacific fell 10%, according to Dealogic data.

Europe was the only region where the negotiation did not collapse. Activity rose 6.5% in the quarter, largely on a frenzy of private equity deals, including a 58 billion euro ($61 billion) takeover bid by the Benetton family and the American buyout fund Blackstone for the Italian infrastructure group Atlantia.

“We’re nervous about the second half of the year, but deals are still ongoing,” said Mark Shafir, global co-head of mergers and acquisitions at Citigroup.

The largest transaction of the quarter was the cash and stock takeover of VMWare Inc by Broadcom Inc in the United States for $61 billion.

Others include Elon Musk’s proposed acquisition of Twitter for $44 billion and the move by India’s largest private lender HDFC Bank to buy out its largest shareholder in a $40 billion deal to create a financial services titan to exploit the growing demand for credit.

For an interactive version of the Reuters chart showing global M&A and private equity volumes in the second quarter, click here: https://tmsnrt.rs/39TsaKX

As stock markets face continued turmoil, corporate boards are hesitant to make expensive bets.

“We are unlikely to see a lot of mega-deals and buyouts happening over the next two quarters. Mergers and acquisitions are hard to do when companies are trading at a 52-week low,” Marc Cooper said. , managing director of the American consulting firm Solomon. The partners.

The volume of cross-border transactions fell by 25.5% in the first six months of the year. A traditional wave of US investment in Europe did not occur as a result of the Russian-Ukrainian conflict.

Philip Morris International Inc.’s $16 billion bid for smaller rival Swedish Match was the only notable cross-border exception in a quarter dominated by domestic deals.

“When you think about the psychology of executives and their level of confidence to cross borders, you have to consider the level of uncertainty in the world and its impact on timing,” said Andre Kellers, head of mergers and EMEA acquisitions at Goldman Sachs Group Inc.

THE DEBT RIDDLE

Financing acquisitions has become more expensive for companies as central banks have raised interest rates to fight inflation.

Even those who have the cash to undertake a trade – or use their stocks as currency – find it difficult to agree on the price in choppy markets.

“Stock market volatility is a major impediment to strategic mergers and acquisitions. When you have equity market volatility, it’s hard to have conversations about value and it’s hard to use stocks as your currency,” said Damien Zoubek, co-head of US corporate and mergers practice. and acquisitions at Freshfields Bruckhaus Deringer.

In Europe, the sharp drops in the value of the euro and the pound have made companies vulnerable to opportunistic overtures from private investors.

Buyout funds have been a major driver of global deals, generating deals worth $674 billion so far this year, accounting for more than half of overall activity worldwide.

“The market dislocation provides a window of opportunity for private equity funds as valuations fall,” said Umberto Giacometti, co-head of Nomura’s EMEA Financial Sponsors Group.

“There is a lot of screening work going on on listed companies for privatization operations and equity investments in public companies. But without price adjustments, activity cannot resume properly,” Giacometti said.

He predicted that the average size of private equity deals will shrink as banks turn off the funding taps and private credit funds become wary of writing big checks.

Going forward, traders expect cross-border transactions between the United States and Europe to resume eventually, thanks to a strong dollar and a widening gap between the valuation of American and European companies.

“With a slightly higher level of visibility than we had earlier this year, you can expect capital flows to pick up and deal activity to pick up, including on the funding side,” Kelleners said. from Goldman.

But caution prevails as companies are still looking to sever ties with Russia or limit their exposure to the region.

“Customers are increasingly looking inward rather than outward,” said Citigroup’s Harding-Jones. ($1 = 0.9508 euros)

(Reporting by Pamela Barbaglia in London and Anirban Sen in New York; Editing by Cynthia Osterman and Susan Fenton)

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