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Has the M&A party passed its peak?

It has been bonus season on Wall Street this month and for the ranks of bankers who work on mergers and acquisitions, it is about as good as it gets.

A record boom in deal activity last year has translated to big gains for bankers. Investment banks have announced bonus increases ranging from 20 to 49 per cent on the back of record fees. That should make sellers of Hamptons property, fine wine and non-fungible token art happy.

But the mood among M&A bankers has become little more circumspect since the turn of the year. Some are asking privately: have we passed the peak of the deal boom that started more than a decade ago?

“Topping 2021 was always going to be difficult,” one prominent rainmaker told me. On the back of a record nearly $6tn worth of deals agreed last year, investment banks generated $157bn in fees, including $47bn just for mergers and acquisition advice. Both fee levels were the most since Refinitiv began collecting data on them more than two decades ago.

The year capped a long streak where ultra low-interest rates, a booming stock market and unprecedented government support across the economy made it cheap to buy rivals, diversify businesses or play catch-up with an ever more digital economy. The share price of boutique advisers such as PJT Partners, Moelis and Evercore more than doubled over the past decade.

Now, though, stock market volatility tied to rising inflation and tightening monetary policy is creating uncertainty. Surely the partial reversal of many of the boomtime conditions for M&A should prompt a slowing of dealmaking?

Well it might not be as straightforward as that. Bankers, being bankers, are bullish on the record, especially the chiefs of publicly traded boutique firms that specialise in M&A and restructuring advisory work.

Ralph Schlosstein, the chief executive of Evercore, said recently that what sustained good M&A environments were strong equity markets, availability of debt and some visibility on the direction of the economy. Those all come together to support chief executive confidence. “We have all of those things right now,” he said at a recent investor presentation hosted by Goldman Sachs.

Paul Taubman, CEO of PJT Partners, also recently told investors that even if interest rates went up significantly, it would not have a dramatic impact on dealmaking as the true drivers of M&A were other factors.

“What’s been driving M&A activity has been this incredible transformation we’re seeing around the globe,” Taubman said. “You have this digitisation trend, which is not slowing down. It’s only speeding up . . . You have the decarbonisation trend. You have the electrification trend. You have so many macro trends where companies need to reposition their business.”

Several other bankers, who asked to speak on background, said the current volatility in the market is likely to put the breaks on dealmaking for some time. But they also added that once valuations come down, cash-rich companies as well as private equity groups sitting on trillions of dollars in “dry powder” of uninvested funds are likely to return to the dealmaking table.

“At the moment most deals I’m working on have been put on pause as sellers and buyers struggle to find agreement on pricing as the share price of their companies keep jumping. But I’m hopeful,” said the prominent rainmaker. “We managed the Covid crisis and we’ll overcome this one too.”

What is unlikely to power the M&A market are acquisitions by special purpose acquisition companies, as the Wall Street phenomenon on the past 18 months has somewhat retreated after a series of scandals and dismal performances. “The number of Spacs coming to market is going to drop to pre-pandemic levels, when nobody cared about them,” said a banker who worked on several transactions in 2020 and 2021 involving companies that list as shells and subsequently find a target to merge with.

Big deals are also not a given, partly because investors are wary of bold M&A at a time of uncertainty. Unilever’s stock dropped significantly after news it had made a £50bn offer to buy GSK’s consumer healthcare business.

“When it comes to big M&A, companies need to be better at communicating with their investor base to ensure they are on board with bold actions,” said Anu Aiyengar, global co-head of M&A at JPMorgan.

The real damper for dealmaking, however, is likely to be coming from Washington, where a new generation of antitrust officials appointed by the Biden administration are determined to revolutionise the rule book.

Jonathan Kanter, head of the antitrust division of the US Department of Justice, said this week that his office will block more anti-competitive deals rather than seek complex remedies that too often fail to protect consumer and curtail certain companies’ market dominance. Microsoft’s $75bn takeover agreement for gaming giant Activision might test the regulator’s appetite to show the new watchdogs mean business.


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