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By Anirban Sen and Pamela Barbalia

NEW YORK/LONDON (Reuters) – Mergers and acquisitions (M&A) activity globally is well below last year’s highs as debt financing markets collapsed and stock market volatility dented valuations, with traders predicting a slow recovery path. in 2023

Total M&A value fell 37% to $3.66 trillion as of Dec. 20, after hitting an all-time high of $5.9 trillion last year, according to Dealogic.

Investment bankers and deal lawyers said activity levels for 2021 were unsustainable and that a correction was inevitable, but blamed macroeconomic uncertainty for holding back several possible bonds in the second half of 2022.

“Some sellers are still hoping for yesterday’s price and some buyers are still hoping to get yesterday’s financing, even though they are no longer available. That’s why we’ve seen less activity,” said Dirk Albersmeier, co-head of the global organization. M&A at JPMorgan.

In the US, M&A volumes fell nearly 43% to $1.53 trillion, while Europe and Asia Pacific saw declines of 27% and 30%, respectively, with volumes just above the $900 billion mark.

Global M&A fell 56% to $641.2 billion in the fourth quarter, driven in part by a 66% drop in private equity activity.

“We’ve had the twin evils of geopolitical tensions and inflation leading to interest rate hikes rearing their ugly heads, and the two of them together have had a really negative impact on the market,” said Tim Lalonde, Evercore’s global investment banking chief operating officer.

The leveraged buyout financing market seized in 2022 as central banks raised interest rates, forcing major private equity firms to either write bigger equity checks or abandon their acquisition ambitions.

But there is reason for some optimism ahead.

“Despite the macro and geopolitical environment, well-capitalized strategic companies are still looking to close deals that are critical to their long-term business strategy,” said Ivan Farman, co-head of global M&A at Bank of America.

Even with macroeconomic controversies, 39 deals worth more than $10 billion were announced in 2022.

“M&A is the best house in a pretty tough neighborhood in investment banking right now,” said Mark Shafir, co-head of global M&A at Citigroup, which advised on three of the year’s biggest deals, including Broadcom’s acquisition of VMWare on the $61 billion purchase of

Eamon Brabazon, co-head of EMEA M&A at Bank of America, predicted a “tempered” first quarter, but said “deal volumes will start to pick up in the second quarter.”

Kroger’s $25 billion acquisition of Albertsons and Amgen’s $28 billion purchase of Horizon Therapeutics were the biggest deals of the fourth quarter.

For both, buyers were able to rely more easily on banks for financing, as investment-grade corporations had easier access to corporate debt to finance large tie-ups.

“CEOs are a bit more bullish on the long-term, although they see tough days ahead in the short-term,” said Faiza Saeed, a partner at Cravath, Swaine & Moore LLP.

Top rainmakers expect cross-border M&A to pick up.

“We are likely to see significant M&A activity in the US in 2023; not only are US companies buying, but also European and other international buyers buying in the US,” said Frank Aquila, senior M&A partner at Sullivan & Cromwell. .

Skadden’s London-based partner, Lorenzo Corte, said the Ukraine war is expected to boost dealmaking in the energy sector as “Europe needs to replace huge amounts of energy coming from Russia with alternative sources.”

GRAPHIC: Global M&A volumes fall after 2021 record (https://www.reuters.com/graphics/GLOBAL-DEALS/zgvobbjgepd/chart.png)

“THE BIG DRUG”

Several megadeals worth tens of billions of dollars collapsed in 2022 as market volatility and a tougher antitrust climate put companies on hold.

“I characterize 2022 as a major slowdown, from a run well above trend to a very low run,” said Paul Taubman, founder of PJT Partners. “The reality is that deals can still be made. But the bar has been raised on the difficulty.”

Banks that backed the buyouts by several sponsors before the markets tanked faced heavy losses on debt they were unable to sell to investors.

Private equity funds are expected to start the recovery as they seek assets at a discount.

“Despite the challenges of raising acquisition financing, private equity funds remain confident because they are sitting on very dry ground and the market is catching up to them,” said Alvaro Membrillera, head of Paul Weiss’s London office. “But before they take action, they want to see the real impact of the recession.”

As geopolitical and economic uncertainty persists, deal activity in early 2023 may mirror the second half of this year.

“If you look back a year ago, none of us probably would have predicted the market selling off to the extent that it did. We were probably more optimistic a year ago,” said David DeNunzio, Wells Fargo’s global head of M&A. .

However, most traders struck a positive note as they prepare for 2023.

“Rising interest rates and the specter of an economic slowdown make you look at companies’ bottom line through a finer lens,” said Michal Katz, head of investment and corporate banking at Mizuho Americas. “But we’re very much open for business.”

(Reporting by Anirban Sen in New York and Pamela Barbalia in London Editing by Bill Bearcrot)

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