Hookups just aren’t what they used to be.
The worldwide value of mergers and acquisitions dropped to around US$1.22 trillion at the end of June 2023, down from US$2 trillion at the end of the second quarter last year. Higher interest rates are the primary reason. While they may be cooling inflation, they are also raising financing costs — and pinching the potential for strong returns via acquisitions. Formerly avid acquirers are sitting it out for now. In private equity, for example, the value of deals has decreased by more than 50%, to US$251 billion, while nearly US$2 trillion sits in cash.
A less friendly regulatory environment, particularly for larger deals, also helps explain the falloff. In May, one of the United Kingdom’s key regulators, the Competition and Markets Authority (CMA), blocked Microsoft Corporation’s proposed acquisition of Activision Blizzard Inc., although it has since indicated a willingness to negotiate. Then the Federal Trade Commission (FTC) sued to block Amgen Inc.’s proposed acquisition of Horizon Therapeutics Public Ltd. Co. If successful, this would be the first FTC lawsuit to block a pharmaceutical deal since 2009.
Despite the global drought in M&A, bright spots remain — if you know where to look. Health care deal value is up 40% year-over-year, boosted by Pfizer’s agreement to acquire Seagen and Eli Lilly’s agreement to purchase Dice Therapeutics. Deal values are also up over 200% in metals and mining, with Newmont’s proposed acquisition of Newcrest the largest potential transaction.
Canada is another M&A hot spot. While there was a solid uptick in North American deal activity overall in May and June, Canada is experiencing a veritable M&A boom. Compared with the second quarter of 2022, transactions have risen 30% to more than US$90 billion.
Why all the M&A activity? The usual reasons apply. These include trying to capture synergies, improving growth in a high-inflation/high-interest-rate environment, buying power from the US dollar, diversifying, acquiring talent and expertise, and eliminating a competitor.
While regulators have been focused on large and mega merger deals, small- and mid-cap merger deals in Canada are not exposed to the same regulatory risk. And despite tighter financing conditions, in our core target universe of small- and mid-cap companies, the strength in equity markets this year is giving acquirers confidence to do deals.
Matt Levine once suggested that “some large percentage of M&A activity might be driven by executives who want to avoid spending time with their children.” Family dynamics aside, M&A activity is likely to increase for several reasons. For the management of small-to-mid-cap companies, especially those that went public during the period of low interest rates, current lower valuations have been hard to stomach. Servicing debt and attracting financing is also more challenging at the same time that revenues are strained because customers are cutting back or postponing purchases. In certain cases, this has led to distressed situations.
While some company founders are holding on tight in anticipation of a re-rating, others accept that one way to grow their business is to move it into stronger hands through acquisition. In Canada, there are several well-known serial acquirers, including Constellation Hardware, CCL Industries, Open Text, Enghouse, and Premium Brands, among others. For example, since 2005, Premium Brands has invested over US$3 billion in 79 transactions. It had a CAGR of 22.4% from 2010 to 2022.
Despite pockets of softness, M&A appetite is expected to return in due course. Why? Because good capital allocation — buying the right company at the right price — creates incremental value over the long term.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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