Downshift: The world’s M&A engine slows in 1Q22

Data InsightDealspeak 6 April

Downshift: The world’s M&A engine slows in 1Q22

North American M&A has contracted from last spring’s peak to return to pre-pandemic levels.

The region recorded USD 547bn-worth of deals in the first quarter, 30% lower than the same period a year ago but in line with activity seen in 1Q18 and 1Q19.

Ever since reaching its zenith in 2Q21, North American M&A has been on a downward trajectory amid high inflation, rising rates, a softening economy, and now war in Ukraine.

The continent suffered less than Europe or Asia, however, contributing 54% of global M&A during the quarter and providing nine of the top 10 deals.

Gaming, real estate lead

The quarter’s biggest deals came in gaming, led by Microsoft’s USD 75bn offer for Activision Blizzard. Two other blockbuster gaming deals were announced a week either side of that: Take Two Interactive’s US 12.2bn bid for Zynga and Sony’s USD 3.6bn deal for Bungie. That ensured acquisitions of North American technology companies accounted for 36% of the continent’s total M&A and a fifth of global M&A.

The real estate/property sector weighed in too. Real Estate Investment Trusts’ (REITs) desire for scale, combined with historically low borrowing costs, drove activity. The largest property deal was Healthcare Realty Trust’s USD 11.24bn acquisition of Healthcare Trust of America, an owner of medical office buildings. Blackstone Real Estate Income Trust showed its appetite for multifamily properties with two multibillion-dollar deals.

Buyout bright spot

One area of strength is private equity. North American leveraged buyouts totaling USD 102bn were announced in 1Q22, a 35% year-on-year increase. Led by the USD 16.6bn takeout of virtualization software firm Citrix Systems, LBOs accounted for a fifth of total North American deal value. The second biggest buyout was Thoma Bravo’s USD 10.6bn offer for Anaplan. Thoma Bravo has now acquired 13 software firms for more than USD 42.2bn since the start of 2021. Undervalued cloud software companies like [NYSE:AI], Sumo Logic [NASDAQ:SUMO] and 2U [NASDAQ:TWOU] could be next.

Meanwhile, special purpose acquisition companies (SPAC) have lost their sizzle. After six quarters of hysteria, SPAC mergers have plummeted to pre-pandemic levels. The first quarter recorded 17 SPAC deals worth USD 8.7bn, a 95% drop from the record set a year ago.

Many companies that went public through a SPAC merger have seen their shares plunge to well below the USD 10 they typically started trading. That presents a buying opportunity for private equity firms and other bargain hunters.

Multibillion dollar pipeline

Next quarter’s outlook looks positive. Many companies have been exploring options for multibillion-dollar deals in the healthcare, software, energy, logistics and government services sectors. Among them are cybersecurity firm Datto [NASDAQ:MSP] and the private equity owners of Cast & Crew, a payroll software company for the entertainment industry. Data-center manager Switch [NYSE:SWCH] and medical device maker Merit Medical Systems [NASDAQ:MMSI] are others. Various oil and gas companies, including HG Energy, Ameredev II and Rockcliff Energy, are also mulling options, ensuring the pipeline for deals remains strong.

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