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The world of mergers and acquisitions (M&A) is getting ready for a dry spell as boardrooms put expansion plans on hold

Image: Reuters Berita 24 English -  As inflation soars and the stock market crashes, many corporate boards are less interested in making ac...


Image: Reuters

Berita 24 English -  As inflation soars and the stock market crashes, many corporate boards are less interested in making acquisitions to grow their businesses.

In the second quarter, merger and acquisition (M&A) activity was hurt by Russia's invasion of Ukraine in February and worries about an upcoming recession.

According to data from Dealogic, the value of deals that were announced dropped by 25.5% from the year before to $1 trillion.

"In the short term, companies are holding off on mergers and acquisitions because they are more worried about how a recession will affect their business. There will be a time for making deals, but I don't think it's there yet "Alison Harding-Jones, who is in charge of mergers and acquisitions for Citigroup Inc. in EMEA, said this.

In the second quarter, mergers and acquisitions (M&A) fell by 40% in the US, to $456 billion, while they fell by 10% in Asia Pacific.

Europe was the only place where people could still make deals. The rise in activity was mostly due to a rush of private equity deals, such as a 58 billion euro bid to take over the Italian infrastructure group Atlantia.

Mark Shafir, global co-head of M&A at Citigroup, said, "We are worried about the second half of the year, but deals are still being made."

Since the stock market is always in chaos, boardrooms don't want to make expensive bets.

"Over the next couple of quarters, there probably won't be a lot of megadeals or buyouts. When a company's stock price is at a 52-week low, it's hard to do M&A "said Marc Cooper, who runs the U.S. consulting firm Solomon Partners as its CEO.

In the first half of the year, the number of transactions between countries went down by 25.5%. In the wake of the conflict between Russia and Ukraine, there was not the usual rush of U.S. investments in Europe.

Andre Kelleners, head of EMEA M&A at Goldman Sachs Group Inc., said, "When you think about the psychology of executives and their level of confidence to make a leap across borders, you need to take into account the level of uncertainty in the world and how that affects timing."

CONUNDRUM OF DEBT

As a way to fight inflation, central banks have raised interest rates, which has made it more expensive for companies to get loans to buy other businesses.

Even people who have enough cash to make a deal or are using their shares as money find it hard to agree on a price when the market is choppy.

"Stock market volatility is a big barrier to strategic mergers and acquisitions. When the stock market is volatile, it's hard to talk about value, and it's hard to use stocks as money "Damien Zoubek, co-head of Freshfields Bruckhaus Deringer's U.S. corporate practise and mergers and acquisitions, said.

Sharp drops in the value of the euro and the pound in Europe made it easy for private equity investors to make offers to companies.

Umberto Giacometti, co-head of Nomura's EMEA financial sponsors group, said, "Market dislocation gives private equity funds a chance to make money because valuations are going down."

"There is a lot of screening going on for both take-private deals and acquisitions of stakes in public companies that involve listed companies. But without a change in prices, business can't start up again "Giacometti said.

He said that the average size of private equity deals would go down as banks stopped lending money and private credit funds became less willing to write big checks.

Dealmakers think that cross-border transactions between the United States and Europe will pick up in the future. This is because the dollar is strong and the difference between how much U.S. and European companies are worth is growing.

"With a little more clarity than we had earlier this year, you could expect capital flows to start up again and deal activity, including financing, to pick up," said Kelleners of Goldman.

But companies are still trying to cut ties with Russia or limit how much they do business in the region.

"Clients are looking inward rather than outward more and more," said Harding-Jones of Citigroup.


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