A plunge in buyout activity tells a lot about spreading economic malaise, across the globe in fact. A recent rundown from the ever-valuable Vested Intelligence highlighted how a decline in mergers and acquisitions (M&A) has spread to every continent and every market. Up to a point, it is easy to find a reason for this in rising interest rates. But there are more fundamental and no doubt more important causes as well. Underlying distortions brought by inflation itself have played an important role, as have currency fluctuations and, of course, the huge uncertainties brought by the world’s increasingly precarious political-economic environment. An improvement – in M&A and in economic prospects more generally – will wait until inflationary pressures begin to abate and confidence in a more orderly economic future returns, maybe later next year.
Dealogic, the premier source of data on buyout activity, makes matters clear. Globally, M&A activity during the third quarter dropped 54 percent from the same period in 2021. The United States saw a 63 percent drop. Europe fared only slightly better. It saw a still large decline of 42 percent, while the Asia-Pacific region suffered a 52 percent drop. So far this year, annual M&A volumes globally have fallen 33 percent from 2021.
Many in the industry, as well as in most all media sources, point to rising interest rates as the cause. Certainly, three consecutive quarters of rising rates somewhere in the western world have made buyouts of every stripe more expensive than they were. The Bank of Canada has led. In its effort to stem inflationary pressure, it has increased its benchmark 5-year rate from about 1 percent last year to about 4 percent. The Federal Reserve (Fed) in the United States has followed suit, pushing up its benchmark federal funds rate from barely above zero late in 2021 to over 3 percent at present. The Bank of England has been almost as aggressive, raising its benchmark rate from about zero last year to over 2 percent presently. Slowest on the draw so far has been the European Central Bank (ECB). It held interest rates near zero until last June, but since has raised them in two steps to about 1.5 percent.
Certainly, these moves have greatly increased borrowing costs and have compelled decision-makers to reconsider a big purchase. But the effect is not entirely one-sided. Because central bankers have promised to continue their anti-inflation fight and raise interest rates further, some decision-makers might well decide to get in while the getting is good, especially if they can lock in rates that 6-12 months from now will look comparatively attractive.
In addition to interest rates, some dealmakers have alluded to regulatory constraints as a cause of the M&A shortfall, especially anti-trust scrutiny, especially where big tech is involved. Cary Kochman, Citibank’s co-head of M&A has pointed to lengthening timelines for regulatory approval. Matthew Abbott, co-chair of M&A for the huge financial law practice of Paul, Weiss, Rifkind, Wharton & Garrison, has made similar claims. Neither man, however, nor the media echoing their claims has offered a concrete example of stiffening rules, much less evidence that they have stiffened radically from last year when anti-trust was much more in the headlines than now.
More fundamental and probably more significant than either higher interest rates or regulatory problems (if in fact, they have become more severe) is the inflation itself. Powerful price pressures in Europe and North America are of course why central banks are raising interest rates. But behind these mechanics are the underlying distortions inflation imposes on economies, quite regardless of the response of central bankers. Because inflation muddles all valuations – between financial and real assets, for instance, long-term and short-term projects, and much more – it erodes any confidence decision-makers can have about the future and in every area of the economy. All hesitate to commit to even small investments, much less go into debt to buy an entire company. As interest rates rise and inflation persists, which seems likely, at least for a while, that decision-making process will become even murkier and less aggressive.
Gyrating currency rates are unsettling matters still more. A prospective American buyer of a British firm, for instance, even if he or she is certain that the target company has good profits prospects, knows that further declines in sterling can wipe out value in dollars, presumably the currency in which this hypothetical American’s liabilities are denominated.
And if this agglomeration of issues were not unsettling enough, there is the war in Ukraine, especially now that nuclear options have received more attention. Even if people could convince themselves that the war will not escalate, there are the uncertainties of accumulating economic effects weigh heavily.
Considering the array influences behind the drop in M&A, the statistics recently offered by Dealogic might stand as a kind of bellwether for overall economic conditions and prospects. Nor can anyone expect any of this to lift if and until inflation shows signs of abating. Especially with energy prices on the rise again, nothing in the present environment points to that kind of relief any time in the next few months. If central banks show conviction, there is a chance for the hoped-for change to arrive perhaps later in 2023.
