On the tail end of a decisive week for Wall Street and the U.S. economy as a whole, mergers and acquisitions and private equity practice leaders are feeling cautiously optimistic as they predict slower but sustained demand in the second half of 2022.
The week could have gone worse, the partners said on Friday, despite the Department of Commerce reporting a second consecutive quarter of declining gross domestic product and the Federal Reserve announcing another 0.75% interest rate hike, not to mention mixed earnings reports from the country’s largest corporations.
“The other GDP indicators are extremely positive—you’ve seen [Fed Chair] Jerome Powell’s remarks,” said Sidley Austin global private equity co-lead Mehdi Khodadad. Consumer spending continued to increase in the second quarter as the U.S. continued to add jobs at a steady rate, Powell said at a Wednesday press conference on the rate hikes, adding that there are “too many areas of the economy that are performing too well” for the country to be in a recession.
Powell also alluded to less aggressive rate hikes in the future. The message, combined with better-than-expected earnings reports from companies such as Pfizer, Apple and Amazon that tampered missed earnings targets from Microsoft, Alphabet, and Meta, helped stocks rally on Friday. By Friday afternoon, analysts confirmed the best month for the S&P 500 since November 2020.
So although the outlook is less rosy than it was several months ago, M&A leaders said they feel there’s plenty of liquidity and opportunism to keep them busy.
“Many of the large corporates, with their healthy financial profiles, and many of the robustly funded private equity firms, will continue forward with dealmaking as they leverage the uncertainties of the moment to acquire assets and talent at a discount and reshape their balance sheets ahead of their competitors,” said Bill Curtin, head of global M&A at Hogan Lovells.
Strategic Buyers Look to Capitalize on Smaller Deals
Sullivan & Cromwell global M&A head Melissa Sawyer said the number and pace of deals will likely decline during the fall as buyer confidence remains shaky and sellers hesitate to reset their pricing expectations. “However, this is ultimately going to be a great time for opportunistic strategic buyers looking to scoop up attractive targets while taking advantage of a less competitive dealmaking environment.”
At Simpson Thacher & Bartlett, M&A practice co-head Eric Swedenburg predicted steady deal flow in private equity as sponsors have funds they must invest and will find opportunity in lower valuations. “That holds true for strategic acquisitions as well—M&A remains one of the most effective ways to achieve growth beyond what companies can achieve organically,” Swedenburg said.
Smaller deals may lead the way, said Khodadad. “We think there’s liquidity in the market and within potential buyers, although inflation is causing them to pause on executing on larger investments,” he said. “In the second half, with the disruption of capital markets, we’re going to see more take-private activity with the disruption in valuations, but we need credit markets to stabilize first.”
M&A Demand Expected to Persist
While the M&A partners acknowledged that deal work has slowed from its record-setting pace of 2021, they also said the buying activity of their clients is keeping their practices busy despite economic uncertainty.
Looking back at the 2008 financial crisis, Curtin said executives will recall opportunities seized and missed. ”The lessons learned during 2008 and 2009 serve as reminders to the C-suite and to deal principals that moments of reduced economic predictability can be turned to their advantage,” Curtin said.
In the coming weeks and months, the partners said that they’ll be judging the strength of M&A by inflation and its impact on credit markets, the cost of capital, the overall mood of certainty versus uncertainty, and the plans of corporate executives.
“The leading indicator for me is what’s happening in the boardroom,” Sawyer said, as many boards will discuss budgets and forecasts at annual strategic meetings in the next two months. “The extent to which M&A features in those strategic plans—whether buy side or sell side—is going to have a huge impact on what happens to dealmaking over the next 12 to 24 months.”
