In the U.S., high inflationary pressures, coupled with rising interest rates resulting in plunging markets, has caused M&A transactions to fall drastically. However, the M&A story is vastly different within Australia, as private equity and sovereign wealth funds have boosted deals to 15-year highs.
Last year, heavy government stimulus and monetary policy focused on decreasing rates following the COVID-19 pandemic, sent merge and acquisition deals soaring, causing Wall Street to go ballistic.
The value of these deals passed the US$2 trillion mark, surpassing more than 30% higher than the previous record set in 2015. It more than doubled the value of the deals made in 2020 and set a new record at 7,896 transactions.
As a result, investment banks cashed in. Goldman Sachs Group and Morgan Stanley logged record profits. Charley Grant from the Wall Street Journal stated, “[Investment Banks] scrambled to hire enough workers and paid out billions of dollars in additional compensation.”
According to Dealogic data, global M&A deals neared US$6 trillion in 2021, including a record breaking $1.56 trillion in the third quarter.
Australia followed the international M&A trend, with a total of US$256 billion in deals, much higher than the annual value record set in 2007. The Technology, Media, and Telecom (TMT) sector attracted the most deals by volume, including the largest M&A deal in Australia’s history, the acquisition of BNPL provider, Afterpay, by US digital payments company, Block Inc, with a value of US$26.7 billion.
However, this year, Russia’s invasion of Ukraine, global supply chain shortages and high inflationary pressures have created aggressive monetary policy tightening which has damaged the market for M&A deals.
For example, U.S. pharmaceutical chain Walgreens Boots Alliance (NASDAQ:WBA) abandoned the sale of its U.Ks. Boots and No7 Beauty Company businesses, because of volatile debt markets.
“[Due to] market instability severely impacting financing availability, no third party has been able to make an offer that adequately reflects the high potential value of Boots and No7 Beauty Company,” Walgreens stated.
American department store retail chain Kohl’s, announced last month that it is terminating any discussions to sell its company, saying that the market has significantly weakened since the start of the bidding process.
As a result of this turbulence, Goldman Sachs and Morgan Stanley investment-banking revenue within the U.S. has fallen by 36% and 37%, respectively. Citigroup Inc. executive Andrew Morton stated that they are expecting a 50%-55% in second-quarter U.S. investment-banking revenue.
In addition, according to Mr. Grants article, Wall Street forecasts have become more pessimistic, decreasing the estimated combined investment-banking revenue this year at Goldman Sachs and Morgan Stanley from US$21 billion to US$17 billion.
Evercore ISI analyst Glenn Schorr, believes that the level of confidence has shaken deal volume.
“Sellers want yesterday’s price, and buyers want today’s price…It takes time to get both on the same page.”
Conversely, within Australia M&A deals have spiked across several domains, reaching 727 mergers and acquisition transaction this year, totalling US$100.2 billion in the first six months of 2022.
This compares with 939 deals worth $US58.5bn for the same time last year, 706 deals worth $US20.3bn for 2020 and 827 deals worth $US44.2bn in 2019.
Takeovers Panel president and Citi’s Australian investment banking head Alex Cartel believes that private capital right now, including private equity and sovereign wealth funds are going after infrastructure assets or infrastructure-like assets.
For example, IFM Investors bought 15% of Atlas Arteria last month, and has asked the private toll operator for access to its financial documents, to decide whether or not to continue with the full takeover bid.
Another example KKR & Co Australia’s $US22 billion bid for Ramsay Health Care. Barclays, Bank of America, Deutsche Bank, and credit Suisse are known to be partaking in the debt financing side.
However, Mr. Cartel believes that these private capital deals would likely slow due investments committees becoming more restrained during an inflationary environment.
Believing that Australia will soon follow the poor M&A figures globally, he stated, “The first half of this year has continued to be strong in Australia … but if we look at the rest of the world, deal volumes have to slow down.”
But big Australian Investment banks are optimistic that activity is expected to remain strong to close out the year.
Goldman Sachs head of Australia M&A, Marissa Freund, believes that these highly volatile markets would likely see financial buyers continue to make acquisitions, stating, “We do expect rising rates and slightly softer debt markets to have some impact – but overall, we expect activity to continue to be strong.”
One major player in Australian investment banking realm is Barrenjoey, who have reached the number one spot, in terms of deal volume, in the first 6 months of the year.
The feat is impressive, as they were ranked 10th in previous corresponding period, and conducted their first M&A deal in December of 2020.
With the help of Barclays, who own 20% of Barrenjoey, the founders, Mathew Grounds and Guy Fowler, have created a model that has combined investment banking with M&A advice, research and equity and debt capital markets capability.
Barclays has helped supply its capital and debt financing skills to assist private equity and wealth funds.
According to Tony Boyd, Barrenjoey advised KKR on its bid for Ramsay Health Care, and advised Brookfield on its A$10 billion bid for AusNet.
