Market Analysis

Global mergers and acquisitions (M&A) activity experienced slow growth in the second quarter, yet many dealmakers remain optimistic, predicting an increase in transactions during the second half of 2024.

High interest rates, a challenging regulatory environment, and a buoyant stock market that has driven up valuations have all contributed to sluggish dealmaking over the past three months.

According to Dealogic data, the number of deals signed globally in the second quarter dropped by 21% to 7,949, while deal volumes rose by 3.7% to $769.1 billion. The number of deals valued at $10 billion or more fell to six, compared to eight in the same period last year.

Leading investment bankers and deal lawyers dismissed concerns about the health of the M&A market, noting that their deal pipelines are strong heading into the second half of the year.

"It just feels like a regular old M&A year, and I think we'll just keep cruising along," said Damien Zoubek, co-head of U.S. corporate and M&A at Freshfields Bruckhaus Deringer. "CEO confidence is very high, and while there's a lot of geopolitical risk going on, people feel pretty good about the economic outlook."

Some advisers pointed out that the rate of dealmaking has returned to pre-pandemic levels seen in 2018 and 2019, when deal volumes averaged around $4 trillion annually.

Buyout activity led by private equity firms surged by 41% to $286 billion during the first half, driven mainly by an increase in take-private deals. This gives dealmakers hope for a resurgence in large leveraged buyouts in the near future.

"The driver for the second half of the year could potentially be a real revitalization in private equity activity," said Jay Hofmann, co-head of M&A for North America at JPMorgan. "We've had this kind of arm-wrestling match between valuations on the one hand, and the desire to deliver the overall returns that private equity has done over the last 10-12 years. And on the other hand, there is the DPI (distributed to paid-in capital) demand from limited partners, and it seems pretty clear that DPI is going to win."

U.S. M&A volumes decreased by 3% to $324.4 billion during the quarter. However, deal activity in Europe rebounded, jumping by 27%, largely due to the value of several large transactions. Asia-Pacific deal volumes fell by 18%.

"We have seen Europe bounce back this quarter, and that is because Europe continues to offer attractive valuations, the rate environment is moderating, and the macro backdrop is improving, although the recent increase in political uncertainty needs to be navigated," said Cathal Deasy, global co-head of investment banking at Barclays.

The recovery in private equity dealmaking has been driven by the increased availability of capital from the burgeoning private credit sector, which is increasingly taking market share from traditional bank loans.

"Private credit funds are going to continue to play a material and probably growing role in the financing markets, but the banks will also continue to play a role," said Dan Mendelow, co-head of U.S. investment banking at Evercore. "Banks have begun to either partner with private credit funds or they are raising their own funds so that they can have that same product capability."

Notable deals in the quarter included ConocoPhillips' (NYSE) $22.5 billion takeover of Marathon Oil (NYSE), Silver Lake's $13 billion take-private of Endeavor Group Holdings, and Johnson & Johnson's (NYSE) $13 billion acquisition of Shockwave Medical (NASDAQ).

"The growth rates in the U.S. continue to be more attractive than most other places in the Western world, and the U.S. capital markets are deeper than anywhere else. So if you're a U.S. corporate, the bar to investing outside the U.S. has gotten higher," said Jim Langston, an M&A partner at Paul, Weiss, Rifkind, Wharton & Garrison.

While large deal activity remained robust, the number of "megadeals" worth more than $25 billion has slowed due to increased antitrust scrutiny.

GAP NARROWING

Top M&A experts noted early signs of a narrowing gap in valuation expectations between buyers and sellers.

"We are getting closer to a more normalized M&A market as agreement on price gets easier in an environment with an expected downward trajectory on interest rates, a solid economic outlook, and low volatility," said Eamon Brabazon, co-head of M&A for Europe, the Middle East, and Africa at Bank of America.

The world's largest corporations, with their significant balance sheets, continue to pursue sizable targets, with deal advisers noting that upcoming elections in the U.S. and other parts of the world have not yet impacted negotiations between buyers and sellers.

In Europe, miner BHP's failed $49 billion bid for Anglo American (JO) signals a resurgent acquisition drive.

"People are more comfortable with where the world is right now," said Andre Kelleners, head of EMEA M&A at Goldman Sachs. "There's a huge move into risk assets more broadly in the markets, but you can also feel that corporate psychology is one that looks at the world as more resilient, more predictable, less volatile, less uncertain than it was 12 to 18 months ago."

Despite overall sluggish activity levels during the quarter, "corporate clarity" deals—structured M&A deals including spin-offs and carve-outs—proved to be a bright spot for dealmakers.

"We’ve seen a growing number of companies that are considering and pursuing carve-out type transactions for a spin-off or sale - there's a lot of appeal to separating non-core or low-growth businesses," said Allison Schneirov, global head of Skadden's transactions practice. "In that way, companies can retain flexibility during the transaction process and entertain third-party bids."

Paraphrasing text from "Reuters" all rights reserved by the original author.