US dealmakers hope strong dollar will soften M&A slowdown

M&A volume in the US is down 40% year-on-year, but dealmakers are hoping the stronger dollar will spark a flurry of activity in the coming months as buyers seek cheap assets in the UK and Europe.

Only $1.2 trillion in transactions have been agreed in the US so far this year, according to data from Refinitiv. That’s the slowest nine months since the coronavirus pandemic began in 2020, which preceded a dealmaking boom. In comparison, M&A volume fell 30 percent in Asia Pacific and 25 percent in Europe over the same period.

However, US dealmakers are in a strong position for cross-border deals as Britain and Europe grapple with a cost-of-living crisis and a much closer war.

Guy Hayward-Cole, Nomura’s head of Europe, Middle East and Africa Advisory, said the sterling’s sharp fall in recent weeks creates an opportunity for many US buyers. “If before you thought UK stocks were cheap, well they’ve gotten very cheap for anyone with dollars to spend,” he said.

However, he warned that buyers should bid their time. “With the outlook for the UK becoming so uncertain, will it hold back from buying or will it actually attract bargain hunters? This could be a very interesting and opportune time for strategic buyers to focus on companies they have always liked,” he said. “Other people will want to sit back and watch what happens for a little bit.”

Global M&A is down 34 percent to $2.7 trillion in the nine months to September compared to the same period last year. Dealmakers closed $642 billion worth of deals in the third quarter, breaking a historic streak of mergers and acquisitions that has seen global transactions surpass $1 trillion for eight consecutive quarters.

“As the global economy has been hit by serious headwinds, M&A activity has been a major casualty. Consolidation interest continues in many sectors so we’re busy, but getting deals across the finish line is really difficult right now,” said Frank Aquila, senior M&A partner at Sullivan & Cromwell.

Private equity firms, once a bright spot for the softening M&A markets, are facing their own reckoning as funding conditions tighten and limit their ability to close big deals. Global acquisitions totaled $642 billion in the first nine months of this year, down 26 percent.

Earlier in the year, a series of big deals, including the $16.5 billion privatizations of Citrix and $16 billion of Nielsen, suggested buyout volumes could surpass the 1-ton mark again. Elon Musk’s $44 billion takeover of Twitter boosted expectations, although the South African billionaire is now fighting a legal battle to back out of the acquisition.

Soaring interest rates amid soaring inflation and the war in Ukraine have instead made it difficult for banks to sell financing packages for these acquisitions, limiting their ability to lend new money.

The third quarter was the lowest volume of institutional lending since 2009, down 85 percent year-on-year, said Michele Cousins, UBS’s head of leveraged finance for the Americas.

In early September, a group of lenders led by Bank of America and Credit Suisse sold $8.55 billion in debt.

The poor debt sale has clouded expectations that banks will be able to clear their stock of unsold funding commitments by the end of the year and open up their capacity to make new loans.

A series of large, software-focused buyouts this summer sidestepped frozen credit markets by turning to direct lenders like Blackstone Credit, Ares, Sixth Street, and Blue Owl.

“Both sponsors and strategists remain active, but their bar is raised as growth expectations recalibrate,” said Joshua Easterly, co-president of Sixth Street Specialty Lending.

One bright spot for dealmakers is the demand for buyouts of companies owned by private equity firms. David Mussafer, managing partner at Advent International, told the Financial Times he has asked companies to outline M&A goals by their next board meeting.

“Our message to the portfolio companies was, come back and give us your top three acquisition ideas,” said Mussafer, whose firm closed a $25 billion financing in May.