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Global dealmaking suffered its weakest start to the year in a decade, as a darkening economic outlook depressed activity and a transatlantic banking crisis put the brakes on risk taking.
The first quarter of 2023 was the slowest start to the year since 2013 as rising interest rates put an end to the flurry of deals that followed the onset of the Covid-19 pandemic and the cheap borrowing costs it ushered in.
The value of mergers and acquisitions dropped 45 per cent year-on-year to $550.5bn between January and March, the largest decline in the first quarter since 2001, according to data from Refinitiv.
”The environment for M&A transactions continues to be very challenging,” said Frank Aquila, Sullivan & Cromwell senior M&A partner. “Increasing concerns about the broader economy and the prospect for a recession later this year in the United States has certainly made decision makers hesitant to move forward with transactions in some sectors.”
An already slow quarter turned into one of historic tumult in March with the collapse of Silicon Valley Bank in the US and the rescue acquisition of Credit Suisse by its local rival UBS.
Advisers fear those episodes will further reduce the potential for a rebound in activity, given increased volatility in markets and the risk of a recession in the US later this year.
“The other question on everyone’s mind is if this banking crisis has been avoided or just deferred,” said Naveen Nataraj, co-head of Evercore’s US Advisory business.
Europe was the chief laggard this past quarter, with regional deal activity down 63 per cent to $81.6bn, while the US saw a 47 per cent drop to $271.7bn and the Asia-Pacific region only declined by 24 per cent to $134.6bn.
Sectors such as healthcare, technology and industrials were bright spots. Healthcare deals accounted for nearly a fifth of deals, reaching a two-year high in the period, boosted by the top transaction of the quarter — Pfizer’s $43bn acquisition of oncology-focused biotech Seagen.
“Big pharma wants move-the-needle assets that are as de-risked as possible,” said Philippe Gallone, a Moelis & Co managing director specialising in healthcare, who warned that there are only a limited number of targets available
In the shifting market, smaller financial firms have been able to grow market share. While JPMorgan and Goldman Sachs led the rankings for M&A advisers, the smaller Centerview Partners took the third spot in the best showing for a boutique operation in decades.
While it has become slightly easier to borrow funding in order to finance deals, buyout firms agreed their lowest value of transactions this quarter since 2020, at $136.1bn.
A chief obstacle to transactions remains falling valuations, with companies still hesitant to negotiate deals that would crystallise the reality of lower prices. However, pressure on private equity firms to negotiate deals could lead to a flurry of activity once the market reopens, according to Simona Maellare, global co-head of the alternative capital group at UBS.
”If you want to sell, you need to be ready because it will be a traffic jam” when the market reopens, she said.
Rising interest rates have also hit the capacity for buyers to finance larger acquisitions. Mid-size transactions have been more resilient, according to bankers.
Still, some corporations and investment firms sought to take advantage of falling prices to make strategic transactions.
For example, CVS agreed to acquire primary care centre operator Oak Street Health for $10.6bn billion, a move that will accelerate its push into other parts of the healthcare chain.
“We’re starting to see companies poke their heads up and see if any opportunities may exist,” said Daniel Mendelow, who is co-head of Evercore’s US Advisory business.
Private credit groups have continued to play a prominent role in helping finance transactions. Firms including Apollo, Ares and Blackstone are poised to write the largest direct loan on record at $5.5bn to help fund Carlyle’s acquisition of a 50 per cent stake in healthcare analytics company Cotiviti, the FT reported.
Meanwhile, Silver Lake assembled one of the heftiest equity cheques for a private equity buyout in its $12.5bn acquisition of Qualtrics alongside Canada’s largest pension fund.
“The last three quarters we have seen more creativity out of private equity,” said Kevin Brunner, co-head of global M&A at Bank of America. “We are also seeing several transactions, primarily in growth sectors, where the large majority of the purchase price is being funded through equity”
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