Deal-making Thrived, Then Hit a Road Bump

Microsoft’s $69 billion bid for the video game company Activision Blizzard was the year’s biggest deal.Credit…Jae C. Hong/Associated Press

Heading into 2022, Wall Street’s deal-makers thought it would be hard to maintain last year’s record-breaking pace for mergers and acquisitions. Still, few thought their businesses would fall by too much.

But the M.&A. business hit turbulence in the middle of the year and hasn’t recovered.

Activity held up compared with historical trends, with about 53,863 deals worth $3.6 trillion announced in 2022, according to Refinitiv, but dropped sharply in the second half of the year. And while the yearly total pales in comparison to 2021’s $5.7 trillion worth of transactions, it’s in line with the value and number of takeovers announced in the previous six years.

“I would sum it up as significantly less activity than in 2021,” said Marco Caggiano, the head of North American M.&A. at JPMorgan Chase. “But because 2021 was historically at such a high level, 2022 looks like a more normalized level of volume.”

Perhaps the bigger question is how things look for next year. Bankers, lawyers and private equity executives suggest that, for all the challenges they faced this year, there are reasons to be optimistic about 2023.

Economic headwinds intensified

Deal-makers like to say that the mergers business is built on corporate confidence. At the start of 2022, the rising markets, strong corporate profits and cheap debt that powered last year’s surge in transactions appeared likely to stick around. Microsoft’s $69 billion bid for the video game publisher Activision Blizzard, the biggest takeover of 2022, was unveiled just a few weeks into the year. (That deal now faces challenges from the U.S.; more on that below.) Indeed, four of the five biggest deals this year, including Elon Musk’s $44 billion takeover of Twitter, were announced before May.

All that was before a potent combination of economic developments — volatile markets, rising inflation, climbing interest rates and geopolitical instability spurred by factors such as the war in Ukraine — shook company boards’ willingness to take risks.

Financing became more complicated

Rattled nerves didn’t only affect corporate directors and management teams. Banks that helped finance takeovers were increasingly unable to sell on the debt to other investors, leaving them with billions of dollars stuck on their books. (Lenders to Musk for his Twitter deal have had to hold onto about $12.5 billion worth of loans, hoping to avoid booking huge losses by selling them now.)

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That jolt to a crucial part of deal-making unnerved would-be buyers and sellers. “We don’t need low interest rates for a robust M.&A. market, but we need a predictable, stable financing market,” said Stephan Feldgoise, a co-head of global M.&A. at Goldman Sachs.

David Sambur, a co-head of private equity at the investment giant Apollo Global Management, added that while many had anticipated more difficulties in obtaining financing this year, “The speed of it, I think, surprised a lot of people.”

Harder-to-get financing had a pronounced effect on private equity firms, which historically rely on cheap debt to power their transactions. About 11,405 deals backed by the sector, worth about $780.5 billion, were announced this year, down 24.6 percent by volume compared with 2021.

Uncertainty over financing, coupled with choppy markets and economic uncertainty, introduced another hurdle: valuation, as buyers and sellers disagreed over how much target companies were worth. In some instances, those disputes froze deal-making altogether. “For companies that are well funded, there’s no need or imperative to do anything,” Mr. Feldgoise said.

Government challenges grew louder

The F.T.C.’s Lina Khan has taken a more expansionist approach to challenging deals.Credit…Pool photo by Graeme Jennings/EPA, via Shutterstock

Not all obstacles arose from economic factors. Government regulators have taken a tougher line against big deals, particularly in the U.S. Both Lina Khan of the Federal Trade Commission and Jonathan Kanter at the Justice Department’s antitrust division have sought to widen the grounds on which they could challenge transactions — even if they lose some cases along the way.

In some ways, that more interventionist approach catches up to the attitude of regulators in Britain and the European Union.

That shift in philosophy led to the F.T.C. suing to block Microsoft’s takeover of Activision, a deal that under prevailing antitrust standards probably wouldn’t be seen to substantially harm competition. But Ms. Khan has argued that approach ignores the effects of big mergers on issues like innovation, particularly as corporate titans become bigger.

Still, some deal-makers played down the risks that heightened antitrust scrutiny would have for boards and executives looking to do an acquisition, since most will still get done — it just might take longer.

“People will need to adjust their strategy,” said Antonio Bavasso, a partner and antitrust specialist at the law firm Simpson Thacher & Bartlett. “Are they willing to litigate to take their deals through?”

SPACs had a rough year

One part of the M.&A. market suffered an especially sharp decline: special purpose acquisition companies, known as SPACs or blank-check funds, which raise money in the public markets to buy privately held companies.

Just as quickly as SPACs surged in popularity in 2020 and 2021, so they fell out of favor this year: 170 such funds were raised, a 75 percent decline from last year, according to Refinitiv. Perhaps more important, the number of announced SPAC mergers fell 22 percent, to 226, while the number of canceled SPAC combinations more than doubled, to 55.

The reasons for the cooling off, experts say, include closer scrutiny of blank-check funds’ governance, as well as the relatively poor performance of companies that have gone public by merging with SPACs. Investors in these funds have also increasingly demanded to get their money back, reducing the overall amount of capital available to the companies that combine with SPACs.

“Redemptions and post-close trading performance are real headwinds to continued M.&A. volume in the sector,” said Mr. Caggiano of JPMorgan. “I think people look at that and say, ‘If I go down that route, the SPAC isn’t really going to bring much capital to the table.’”

What lies ahead?

Despite all those challenges, M.&A. advisers (who tend to be a largely optimistic lot) believe there’s reason to hope for a respectable 2023. Among them is the fact that many companies want to expand or shift their business strategies, and doing a deal is often the best or easiest way of doing so.

That doesn’t necessarily mean a uniform pace of deal-making. Mr. Caggiano expects 2023 to start off slowly before ratcheting up, in a reverse of 2022. But he and others believe that mergers activity should remain fairly robust.

“The strategic imperatives that came out of Covid — repositioning, scale, onshoring — none of those have changed,” said Mr. Feldgoise of Goldman. “Boards are saying, ‘I want to fortress my company.’”

And even the challenges that 2022 has presented shouldn’t be, well, deal breakers. Take higher financing costs: “The cost of money now is essentially normal. The world we were living in previously, that was abnormal,” said Mr. Sambur of Apollo. “It’s not like deals can’t work with financing costs where they are.”

Or consider antitrust enforcement. Mr. Bavasso of Simpson Thacher said regulators were unlikely to let up, particularly in the U.S., as the likes of Khan continue trying to rewrite the rules of antitrust by challenging deals.

But Mr. Feldgoise predicted many companies would weigh the risks of antitrust action against a host of other considerations. “It’s been a factor in every administration, but it’s one of several factors as it always has been,” he said.

Ultimately, companies and private equity firms intent on doing deals are going to carry on hunting — and the turbulence of today’s landscape may even yield bargains. “In our experience, our best performing funds are funds that we deploy during recessions and market downturns,” said Matt Nord, Apollo’s other co-head of private equity. “The more stress there is in the system, the bigger the pipeline of opportunities there are for us.”

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