With summertime M&A in North America down to lows not seen since the onset of the pandemic, bankers have joked their time could be better spent at the beach.
They were probably right: Just 588 deals were announced in August, one of the lowest monthly totals this century, with only May 2020 and August 2003 quieter. But those staying at their desks saw signs of a rebound: August M&A volume of USD 121.3bn was almost double July’s USD 63bn and up nearly a third on June’s USD 92.8bn.
Bankers say the desire to transact behind the scenes remains strong. They are hopeful September brings an uptick in merger announcements as people become more accustomed to persistently high inflation, rising interest rates, and fears of recession.
“A good number of folks are itching to do deals,” says Wayne Kawarabayashi, head of M&A at Union Square Advisors. “Getting the stars to align is more challenging in this environment.”
Two major themes characterized August’s activity: The first is that technology deals are an ever bigger driver of overall M&A.
During the first eight months of 2022, tech deals accounted for 41.2% of all transactions. That compares with 30.3% in all of 2021.
A big part of that, says Kawarabayashi, is a desire by larger strategic players to consolidate as they aim to emerge stronger from today’s period of uncertainty. In August alone, AppLovin [NASDAQ:APP] offered USD 15.4bn for Unity Software [NYSE:U], Global Payments [NYSE:GPN] agreed USD 3.7bn for EVO Payments [NASDAQ:EVOP], and Semtech [NASDAQ:SMTC] bid USD 1.25bn for Sierra Wireless [NASDAQ:SWIR].
The second major theme is that private equity’s share of deal volume has actually strengthened in the year to date, despite the rising costs of debt. PE buyouts and exits accounted for 38% of USD 1.2trn in total M&A for 2022 YTD, compared with 33.9% of 2021’s USD 2.97trn.
Sponsors have preferred to buy rather than sell during the sunken valuations of 2022’s first eight months, with USD 256.8bn in buyouts far exceeding USD 201.9bn in exits. Last year, as valuations soared instead, exits of USD 499.3bn inched past buyouts of USD 495.6bn.
Another reason for the buyout preference is PE firms have raised big funds they need to deploy. August saw two big buyouts – Avalara’s [NYSE:AVLR] USD 8.76bn deal with Vista Equity and Ping Identity’s [NYSE:PING] USD 2.75bn agreement with Thoma Bravo.
What will be instructive is how well banks financing the USD 16.5bn buyout of Citrix Systems [NASDAQ:CTXS] – agreed in January before markets soured – are able to sell their paper in the leveraged loan and high-yield bond markets after Labor Day. “How that fares will be an interesting signal to the market about what can get done,” Kawarabayashi says.
After the biggest first-half decline in stock market valuations in 52 years, a gap between buyer and seller expectations has emerged.
That may result in more creative deal structures, including earnouts, smaller stake sales, and a resurgence of private investments in public equity (PIPEs), says Kawarabayashi. The latter happened in the early days of the pandemic, when private equity invested in public companies unwilling to sell entirely.
Venture-backed companies, especially those not leaders in their field, will face pressure to sell if their backers pause funding.
“Deals are taking longer to get done because of market volatility,” says another banker. “We think activity is ramping up.”