Mergers and acquisitions (M&A) activity goes through very violent ups and downs based on cycles, with sharp rises in good times and sudden collapses as soon as uncertainties appear. After Recession of 2020 by CovId, the value of operations in 2021 was a global historical record, but the war in Ukraine and rate hikes led to a sharp correction in 2022.
With this sawtooth trend continuing, investment bankers who advise companies and funds on their transactions were confident of a strong recovery in agreements in 2023, but for now the market is wobbling and experts are already are warning that buybacks, especially those paid for in cash, could be postponed until 2024.
In the first quarter of 2023, M&A continued to decline, as announced combinations globally were valued at $0.58 trillion (0.52 trillion euros), down 48% from the same period. lower than the prior-year period and 27% in the final quarter of 2022, according to Dealogic.
This analysis firm explains that “when many thought bottom had been hit, global operations posted another decline in the first quarter. Rumors about a possible recession intensified, with central banks combating high inflation.” Interest rates have continued to rise, and some of the biggest bank failures since the great financial crisis of 2008-09 shook the markets.
In Spain, acquisitions fell 73% to $5.9 billion between January and March, the worst quarter for M&A in the country since 1997.
Bankers are of the view that the cautious trend while initiating investments across boards of directors will continue throughout the year, apart from a few trendy sectors such as pharmaceuticals, renewable energy and technology where operations are on hold.
In the case of large US listed companies in the S&P 500, which set trends for the rest of the world, Goldman Sachs estimates that investment in acquisitions will be located at $273,000 million in 2023, down from $288,000 million. A far cry from a weak 2022 and 2021 fiscal year’s 349,000 million.
“Uncertainties about a potential recession, a high interest rate environment and a sharp decline in balance sheet liquidity mean that the amount of money allocated to M&A will remain depressed in 2023,” says the Wall Street bank. Partly, this can be offset by mergers through stock exchanges. “Companies will probably prefer to use shares, which are valued at very high levels relative to historical averages, as the currency for their acquisitions.”
Indeed, it is strange that the improvement in stock prices is not keeping pace with the uptick in corporate operations. Traditionally, executives and boards of directors have more confidence to buy when the market is good.
But bankers advising on the transaction say the main problem is that there remains a huge discrepancy between the price sellers want and those offered by potential buyers. “Sellers, once the worst of the correction is over, see it as possible to get valuations similar to those set two years ago. Heavy discounts”.
Goldman expects an M&A recovery to come in 2024, when interest rates stabilize and the economy overcomes the current turmoil. But if Western economies are confirmed to be slipping into recession, the return to operations could be delayed.
“In our central economic scenario, where recession is avoided, the outlay on cash acquisitions by the S&P 500 could increase by 15% in 2024,” say analysts at the unit. But if there is a recession, taking historical precedents, M&A spending could fall 60% from the peak marked in 2021.
According to Goldman, large US companies are going to prioritize shareholder remuneration through dividends and buybacks (totalling $1.4 trillion), organic investments ($936,000 million) and R&D outlays ($559,000 million) in 2023.