U.S. dealmakers hope strong dollar will dampen M&A decline

U.S. M&A activity has fallen 40% year-on-year in volume, but traders are hoping the stronger dollar will spark a flurry of activity in the coming months as as buyers buy cheap assets in the UK and Europe.

So far this year, only $1.2 billion in deals have closed in the United States, according to Refinitiv data. It was the slowest nine months since the start of the coronavirus pandemic in 2020, which preceded a deal boom. In comparison, the volume of mergers and acquisitions fell by 30% in Asia-Pacific and by 25% in Europe over the same period.

However, US negotiators find themselves in a strong position for cross-border deals as Britain and Europe grapple with a cost-of-living crisis and war much closer to home.

Guy Hayward-Cole, head of Europe, Middle East and Africa consulting at Nomura, said the sharp drop in the pound in recent weeks is creating an opportunity for many US buyers. “If you used to think UK equities were cheap, well, for anyone with US dollars to spend, it’s become very cheap,” he said.

However, he warned that buyers may want to bide their time. “As the UK’s outlook becomes so uncertain, will it refrain from buying or will it really attract bargain hunters? For strategic buyers, this could be a very interesting time and timely to take a step toward businesses they’ve always loved,” he said. “Other people will want to sit down and watch a little bit of what’s going on.”

Global mergers and acquisitions are down 34% from the same period last year to $2.7 billion in the nine months to September. Dealers closed $642 billion worth of deals in the third quarter, breaking a historic streak of mergers and acquisitions where global deals topped $1 billion for eight consecutive quarters.

“As the global economy has been hit by serious headwinds, mergers and acquisitions activity has been the main victim. Interest in consolidation continues in many sectors, so we are busy, but it is really hard to do deals right now,” said Frank Aquila, senior M&A partner at Sullivan & Cromwell.

Private equity firms, once a bright spot for looser M&A markets, are struggling on their own as funding conditions tighten and hamper their ability to do big deals. Globally, $642 billion in redemptions were made in the first nine months of this year, down 26%.

Earlier this year, a series of large deals, including the $16.5 billion privatizations of Citrix and $16 billion of Nielsen, signaled that takeover volumes could once again exceed $1 billion. Elon Musk’s takeover of Twitter for $44 billion has heightened expectations, although the South African billionaire is currently fighting a legal battle to back out of the takeover.

The sharp rise in interest rates amid soaring inflation and war in Ukraine has instead made it difficult for banks to sell financial packages for these buyouts, reducing their ability to make new loans.

The third quarter was the lowest volume of institutional loan issuance since 2009 and was down 85% from the same time last year, said Michele Cousins, head of leveraged finance for the Americas. at UBS.

Earlier in September, a group of lenders led by Bank of America and Credit Suisse sold $8.55 billion in debt to fund the takeover of Citrix at steep discounts, absorbing more than $600 million in losses while retaining the riskiest elements of the $15 billion overall funding.

Poor debt selling has clouded expectations that banks could liquidate their inventory of unsold funding commitments by the end of the year and open up their ability to make new loans.

A number of big software-focused takeovers bypassed frozen lending markets this summer by turning to direct lenders like Blackstone Credit, Ares, Sixth Street and Blue Owl.

“Sponsors and strategics remain active, but their bar is higher as growth expectations recalibrate,” said Joshua Easterly, co-chairman of Sixth Street.

A bright spot for traders is the demand for acquisitions among companies owned by private equity firms. David Mussaver, managing partner at Advent International, told the Financial Times that he has asked companies to outline their M&A targets at their next board meeting.

“Our message to portfolio companies has been, come back and give us your top three acquisition ideas,” said Mussafer, whose company closed a $25 billion fundraising round in May.

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