What’s Next for US M&A

Gregory Pryor and Michael Deyong are partners at White & Case LLP. This post is based on their White & Case memorandum.

As predicted in our previous M&A report, 2022 has not lived up to the runaway performance of 2021. As activity—still at impressive levels considering everything that has been thrown at the deal market—takes a breather, we consider five fundamental trends that may play out over the coming months.

1. Rates and financing costs to increase

The increasing interest rate environment has, and will inevitably continue, to make deal financing more costly as spreads widen. Leveraged loans and high-yield bonds are at the riskier end of the curve, and PE firms rely heavily on this financing. It is likely that direct lenders will step in to pick up some of the slack left by more cautious capital markets. Either way, buyers dependent on acquisition financing will need to adjust for this accordingly—potentially, by using their cache of dry powder to write larger equity checks.

2. Acquirers will capitalize on attractive multiples

It is reasonable to expect that M&A activity will continue with a more cautious tone, as it was headed toward the end of the second quarter. However, deals will continue. Companies that set their sights on assets and have a clear, well-articulated strategic rationale for pursuing those deals will press ahead with the support of their shareholder bases. PE has ample dry powder at its disposal and has proven adept at capitalizing on market dislocations in the past. Indeed, the markdown in EBITDA multiples will make many opportunities all the more compelling over the next six to 12 months, and acquisitions made during this period promise to deliver when valuations recover.

3. Going deeper on due diligence

There is no escaping the fact that risk sentiment has cooled. Acquirers are spending, and will continue to spend, more time on their due diligence processes, prepping on the regulatory side, forward planning for any potential issues that may arise and justifying their investment theses before bringing deals to their executive or investment committees for sign-off. Supply chain resilience will continue to be a focal point, and ESG will be further integrated into evaluations. Patient, steadfast bidders with deeper insight into their prospective deal targets will be rewarded for these efforts.

4. More hold-ups and aborted deals

This year has presented some truly blockbuster deals, from Microsoft’s US$75.1 billion offer for Activision Blizzard, to the proposed US$71.6 billion Broadcom-VMware merger, and Elon Musk’s bid for social media platform Twitter, valued at US$41.3 billion.

All three hit their own snags or show signs that they may not follow through. The Activision deal is facing scrutiny from the UK’s Competition and Markets Authority (CMA), while Broadcom must wait for EU competition authorities to green-light the purchase, which is likely to take some time and may ultimately be blocked with mitigating conditions. And Elon Musk is seeking to walk away from the Twitter deal, which has landed that transaction in the Delaware courts. From regulatory hoops to further market volatility impacting bid-ask spreads, there is potential for more such deals to face complications.

5. Overseas opportunities to emerge

Amid the risk-off pivot and the higher rate outlook, the US dollar is the strongest it has been in 20 years, to the detriment of other major currencies. The euro has fallen to parity with the greenback, down approximately 20 percent over the past year. While a strong dollar is slowing foreign revenues and profitability at US multinationals, buyers with lots of liquidity will be incentivized to look overseas for potential buy opportunities. Not only have valuations come down, US acquirers can benefit as their cash stretches that much further when shopping for assets than was the case 12 months ago.

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