Dealmaking languishes at decade low on private equity drought

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Global dealmaking is languishing at a 10-year low as high interest rates chill private equity activity and a more hostile antitrust environment deters companies from pursuing rivals.

At $2tn, the value of M&A deals announced in the first nine months of the year was the lowest since 2013 and down 28 per cent on the same period in 2022, data from the London Stock Exchange Group shows.

The fall in big deals worth $10bn or more has been particularly stark, dropping 42 per cent over the first nine months of the year compared with the same period last year.

A slow start to the year was capped with the worst third quarter since 2012 with $616mn of deals.

US banks have retrenched as M&A has slowed from the post-pandemic frenzy of 2021. Worldwide investment banking fees have slipped 12 per cent from this time last year to $76bn, with fees for the third quarter at their lowest quarterly level since the start of 2016.

A trio of potential blockbuster deals unveiled since the start of September has raised hopes among bankers and lawyers of a revival in the market, as uncertainty around the economic outlook starts to lift.

“In the last two weeks I’ve received calls from big [strategic bidders] looking at multibillion transactions in their sectors, and those are phone calls I didn’t get six to 12 months ago,” said Bill Curtin, global head of M&A for the law firm Hogan Lovells.

Last week the US technology company Cisco agreed its largest ever acquisition, a $28bn deal to buy US software maker Splunk, while Norwegian classifieds business Adevinta confirmed it had received a non-binding approach from private equity houses Permira and Blackstone, pushing its enterprise value up to about $14bn including debt.

Earlier this month two of the world’s largest packaging companies, WestRock of the US and Ireland’s Smurfit Kappa, entered into a tie-up to create a global group worth almost $20bn.

“On balance boards feel they have managed the challenges of the last year and a half and are now focused on how to stay competitive and relevant for the next five to 10 years,” said Jan Weber, head of M&A for Europe, Middle East and Africa at Morgan Stanley.

But dealmakers warn they are not expecting activity to roar back. This is the second year in a row that global M&A declined by a double-digit amount, the first time that has happened since the aftermath of the financial crisis in 2008-2009.

“It’s hard to see any one big driver for a slew of upcoming M&A. While momentum is building, deals in the $1bn-$5bn territory are going to be the mainstay of the bigger-end of the market,” said JPMorgan’s co-head of M&A for Emea, Dwayne Lysaght. “People are still relatively inwardly focused.”

Interest rate rises and a tougher regulatory environment also make a rapid rebound challenging.

Higher rates have driven up the cost of borrowing to fund acquisitions. That has taken a particular toll on private equity buyers, an engine for M&A in recent years.

“Private equity activity levels are still down and that is primarily due to the debt financing markets and the cost of financing remain high, certainly compared to prior years when sponsor activity was much higher,” said Krishna Veeraraghavan, a partner at Paul Weiss.

PE transactions totalled $393bn so far this year, a 41 per cent decrease compared with the same period last year.

Would-be buyers have also been put off by a more muscular approach from antitrust regulators to acquisitions. Microsoft’s $75bn takeover of Activision Blizzard was initially blocked by the UK competition regulator, which only approved the deal after the terms were significantly reworked, while in the US, the Federal Trade Commission has launched a lawsuit challenging serial acquisitions by private equity firms on antitrust grounds.

“Most deals are being cleared despite the negative attitude of some regulators,” said Frank Aquila, senior M&A partner at Sullivan & Cromwell. But he added that getting the necessary antitrust approvals was still a challenge, as was financing.

“Tighter credit has led many buyers to increasingly tap the private debt market,” he said. That has made doing the largest deals more difficult because it is trickier to assemble such sizeable debt packages.

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