Speaker 1 00:00:12 Welcome to the Lending Lu Down. I'm CJ Doherty, head of market Analysis at Refinitiv lpc, and I'm delighted to be joined by Matt Tool Director of Deals Intelligence here at Refinitiv. We have a little bit of a change up today, uh, as up to this point. Our podcast have been primarily focused on lending activity, you know, whether it be private credit or the syndicated loan market. But today we're gonna focus on m and a activity. As you know, many market participants are currently trying to gauge where m and a deal flow is at and where it's headed. Um, of course, all this is still very related to the loan market as a, a chunk of m and a activity is ultimately financed via loans and indeed bonds. And so with all this in mind, I've pulled in our resident expert on all things m and a. So welcome Matt. Thanks for joining me.
Speaker 2 00:00:57 Of course. Great to be here.
Speaker 1 00:00:58 Okay, Matt, so let's start with the biggest headline in the last week. The fallout from the collapse of Silicon Valley Bank and Signature Bank is still reverberating throughout the broader markets and worries persist around some other banks even as of today, March 17th. Uh, so you know, from your perspective, has there been any visible impact on m and a yet, or is it too early to tell?
Speaker 2 00:01:21 I would definitely say that it's too early to tell. You know, it's big kind of collapse of, of, of kind of major, major banking players is never a good thing for kind of market confidence or kind of general, um, you kind of confidence in, in deal making. But, you know, I think it'll take a bit of time to figure out exactly kind of what the repercussions are are of, you know, some of this, you know, kind of volatility that we're seeing certainly in, in the banking sector. Um, you know, I think it's, it's, uh, it's certainly something that is being closely watched, certainly in the technology community, which has been a huge part of the m and a story over the last number of years. But I think we'll put that in the too early to tell category at this point, um, and, and kind of see kind of how the after effects and, and changes potentially to, um, you know, you know, some of the, you know, kind of just general outlook on the market, uh, come into play here.
Speaker 1 00:02:08 Okay. So, we'll, we'll stay tuned for more on that. Um, and next, like obviously we saw m and a activity tumble, uh, in 2022, you know, amid the market volatility and the economic uncertainty. What are you seeing on the m and a front overall, uh, so far this year? You know, are there differences across regions?
Speaker 2 00:02:27 Yeah, we, we, you know, we saw a, you know, a pretty dramatic fall off in m and a last year where, you know, we saw the, the, the, the largest, you know, six month decline, uh, in m and a activity since we began tracking m and a 40 years ago. And so, you know, the impact of kind of the many different kind of headlines, uh, in 2022 with, you know, kind of, you know, starting off the year with kind of war in Ukraine and then moving into recession fears, uh, rising inflation, uh, a very dramatic rise in interest rates and, and some major stock volatility kind of really, you know, kind of just shut, you know, down all the kind of deal making that we had been seeing, you know, after the record that we saw in, in 2021. And that has spilled on into this year.
Speaker 2 00:03:07 We're now tracking at, uh, a decade low. So we're this, it's the slowest start for m and a, uh, since 2013. And it is pretty broad based, you know, steeply, double digit declines, uh, you know, around each of the regions, uh, the Americas and, and Europe. Uh, you know, kind of, you know, kind of quite negative. And, you know, there's some different stories in some of the different countries where we are seeing some bright spots in Australia and Japan. But, you know, think, I think broadly the, you know, the real factors that that, that push down m and a in the latter half of, of 2022 have certainly spilled over into this year and, and now facing kind of some new, uh, in, you know, some, some new indicators, um, some new changes in the market, and obviously some, some current events that we just spoke about.
Speaker 1 00:03:48 Okay. Yeah. And, and against that backdrop, which you've described, are, are valuations coming down or sellers willing to, willing to transact at lower purchase multiples?
Speaker 2 00:03:56 You know, that is one of the, you know, kinda the, the things that we have been observing is, you know, in the, the course of the slowdown, we have seen valuations come down about a hundred, a hundred basis points since, uh, the beginning of 2021, where we saw a high, uh, for some of the EBITDA multiples and some of the other, uh, multiples that we track. And so, you know, when we do have downturns in m and a, there are also often pockets of opportunity for, uh, for buyers who are, who are looking to, to make a move. You obviously, you know, taking into account all the different pieces that go into deciding whether to, to transact and, and, and, and pursue a merger. But, you know, one of the pieces that we were looking at, you know, in the, the run up to, you know, the record year that we saw in 20 20 21 was a, you know, very, very high multiple and, and really some, some expensive deals happening. And so we have seen that come down. Um, and I think that will, you know, certainly with all the other factors play into, you know, what might, what might come as we look into, you know, a an increase in m and a, you know, potentially at the, the latter half of this year or even into into 2024.
Speaker 1 00:04:56 Okay. And, and as we dig a little bit deeper maybe into the, to the underlying deal flow, what's the trend with regard to leverage buyouts specifically?
Speaker 2 00:05:04 Yeah, so I mean, you know, the LBOs and, and private equity, you know, have been, you know, a very large percentage of m and a activity over the last two years. You know, we saw, you know, kind of record levels of capital raise. So private equity had, you know, tremendous levels of capital and, and some really record funds, um, which they were able to put to work, you know, through the pandemic and, and, and well after, just because of the market conditions and, and the, the credit environment was so favorable for private equity. And so, you know, we are seeing, uh, a similar decline in private equity LBOs this year as we are seeing with the broader market. It might be outpacing the market a little bit, um, because, you know, many private equity transactions, uh, are certainly, you know, kind of very, very focused on the financing equation and, and whether or not it makes sense to do the deal, um, you know, with the levels of capital needed and, and what financing might be available, whether it be bonds and loans.
Speaker 2 00:05:52 So we, we have seen some pretty sizable transactions, um, you know, just to start off the year. Um, but it, you know, generally I think private equity is kind of on the sidelines a bit trying to evaluate, you know, at what point does, uh, you know, do interest rates start to, uh, level out, you know, when can we think about financing in a, you know, maybe a potentially more, um, you know, kind of, uh, kind of par, you know, even keeled way and kind of, you know, begin to look out and see some of those, um, those, those targets we've had our eye on. You know, do they make financial sense? Um, and, and, and we'll be able to get the returns that, that we require. So, you know, I think along with much of the m and a market, private equity is probably in a recalculating mode, you know, looking to see kind of how deals might get done and, and what it might require to get those sales done.
Speaker 1 00:06:34 Okay. Yeah. And, and what are you seeing across sectors? You know, earlier you mentioned the tech sector, but like in general, what are the notable trends you're seeing?
Speaker 2 00:06:42 Yeah, technology has, has really been, you know, the, the large kind of driver of, of all things. And, and, and it's, you know, from an m and a perspective we're seeing, you know, large technology transactions. So, you know, uh, you know, in semiconductors, uh, in in software we're also seeing, you know, kind of tech adjacent transactions where, you know, healthcare companies are buying tech companies to help manage, you know, all their, all their, their customers and, and even customer data. So, you know, tech is growing and growing, you know, as we've seen over the last, uh, couple of years and, and last year accounted for, you know, a record, you know, kind of 25% of overall m and a activity and, and that is kind of steeply fallen off as you would imagine with, um, you know, some of the, the volatility that we've been seeing in some of the big tech names and just in general, you know, kind of the focus on, on on those names.
Speaker 2 00:07:26 And, and there they're going through obviously some major changes in, in, in cost cutting and, and, and job cuts as well. Um, you know, we have seen a, a pretty big, uh, start to the year for healthcare. Um, and that is really driven by a mega deal that was just recently announced from Pfizer, but you know, it was really 10 years ago when, um, you know, kind of the kinda the big pharma, you know, kind of group of, of companies really kind of kicked off this kind of this, this latest m and a cycle. Um, you know, that was, was really very dormant post-financial crisis and all the big pharma companies were coming in, in, in, in 20 14, 15 and, and, and making some really big transactions. But, you know, obviously with, with, with healthcare and biotech and, and, and pharma, you know, that that is a pretty cyclical business and always looking for new things.
Speaker 2 00:08:08 So, um, we've, we've seen, you know, kind of a pretty strong start to the year in healthcare also materials, um, and industrials, which kind of also plays into that infrastructure play, which is, is one that I think a lot of people are focused on. And so we are seeing, you know, kind of a very, you know, kind of, um, a very slight increase year over year for materials and industrials and actually, you know, a pretty strong number of deals happening in that space where, you know, that shows a much more broad based, uh, kind of pace of deal making across the middle market as well, as well as some of the, the large cap transactions. Yeah.
Speaker 1 00:08:38 Let's talk about size for a moment then, you know, are, are you seeing differences in activity when it comes to m and a for large corporate versus middle market companies?
Speaker 2 00:08:46 Yeah, I mean, I think the, you know, the, the, the, the large cap kind of, you know, kind of mega merger, you know, was certainly the, a hallmark of of of 2021, you know, and, and I think that will be an asterisk for, for many years to come, you know, cuz you know, the market conditions were just, you know, you know, so favorable for, for m and a and, and we have seen that come down. So right now, you know, the declines are really being led by that mega merger large cap. But, you know, we are seeing declines kind of in, in all size areas, but the mid-market does seem to be, you know, a, you know, you know, kind of certainly outperforming the general market. Um, you know, mid-market m and a is down by number of deals down 25%, um, compared to, you know, 42% for, for large cap m and a.
Speaker 2 00:09:26 So, you know, I think there is always a very healthy, um, you know, kind of amount of activity happening in the mid-market, obviously, you know, changes depending on overall conditions, but it, it does seem, you know, that some of the smaller transactions and potentially some of the, you know, kind of the downstream effects of some of the big m and a deals where companies are selling off non-core assets or, you know, potentially, you know, looking to spin off or, or sell, you know, some, some, some, you know, portion of their business where we're seeing some of the smaller deals and also where we're seeing some of the smaller private equity LBOs come into place as well.
Speaker 1 00:09:56 Okay. Great. And, uh, final question for you. Basically using your crystal ball, what's your outlook for the rest of the year? You know, what's in store for m and a deal flow?
Speaker 2 00:10:04 Yeah, so we surveyed, uh, over 500 deal makers at the beginning of the year, um, to kind of see what they were thinking about as far as m and a, and there was some bullishness in, in that space. And, and, and, and I think looking at the beginning of the year, you know, certainly I think many deal makers thought that we were gonna see, you know, a bit of a, you know, a bright spot. I think, you know, economic conditions are still, you know, changing pretty rapidly. Um, the ceo uh, uh, survey that came out just this week from the conference board also had, you know, the first uptick, uh, since 2021 in, in CEO confidence and, and m and a is very much driven by confidence. Now, I think some of the, the, the events of the last week or so, you know, might have a, an impact on that.
Speaker 2 00:10:42 And I think, you know, as, as I mentioned earlier, you know, the recalculation of what do all the different changes that we've seen in marketing conditions, you know, what does that mean for my deal making playbook? You know, I think many advisors, uh, you know, bankers, lawyers, lenders are, you know, certainly, you know, busy working with customers and clients to say, you know, kind of what, what are some of the, you know, kind of feasible options that might happen or what are the things that need to happen for us to potentially do a deal. But I think, you know, I think we'll probably continue to see a good amount of pause for certainly the first half of this year. Hopefully see some, some more steadying in some of the economic indicators, um, you know, that I mentioned before with inflation, um, you know, with, um, interest rates potentially level leveling out, you know, potentially really putting into bed whether or not we're gonna have a recession or not. And then, you know, hopefully begin to see, you know, some more deal making potentially in the latter half of the year, certainly for some companies taking advantage of, of the, you know, kind of the, the lower valuations and, you know, just the, the general opportunity that sometimes comes from a downturn. Okay.
Speaker 1 00:11:42 So some optimism there for, for later in the year in terms of deal flow, uh, and much to monitor. Uh, and on that note, I think we'll, uh, we'll wrap up for today, Matt. Uh, we'll keep up with your m and a coverage in the coming months in order to stay abreast of the, the key trends in the market. And, uh, thanks very much for joining me today, and thank you all for tuning in. I invite you to check out re refinitiv.com/deals intelligence. For more m and a insights and analysis, I'm CJ Doherty. Subscribe to the lending lowdown on your favorite podcast platform.
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