Global M&A Market Outlook

Romaine Bostick: Pleased to say that we have a very special guest, the Global Co-Head of M&A over at JP Morgan joining us right now alongside our very own Ed Hammond. Ed, take it away.

Ed Hammond: Romaine, thank you so much. Anu great to have you on. I was all set up to talk about how bad it's been and how difficult a year we're in and, then there we go, we get a $70-billion merger Monday to kick us off. So look, I think it makes a very obvious question, which is what, if anything, can we read about today's news in terms of next year and the mood going into it?

Anu Aiyengar: Oh, and good to see you again. And we managed to get at least a couple of our deals announced today, just so we can have a merger Monday. And it's been a good flavor, too, as you said. Built in the Horizon deal and the Cooper deal, you had multiple bidders there competing with each other to get to the finish line. Companies that went public and their evaluations have come down materially. Take private transaction. We did a corporate divestiture in Europe. So these themes I think you're going to continue to see in '23. You were talking earlier about August being the high point. I really think of this year as two halves. The first half was very much in line with the pre-pandemic levels. The second two quarters materially down. It's about 2.3 and I think we'll do 1.4 or so trillion in the second half. And the next year, I expect to be the reverse. So overall flat, but the first half more like the second half of this year and the second half hopefully more like the first half of this year, but all in, flat.

Ed Hammond: So M&A will bottom out sometime, I guess, in the middle of next year. But even when it does recover and even when the appetite clearly does come back, we need the financing market. Right now, they're not there. When do you see that returning and facilitating the kind of boom we need in M&A to get that robust market back?

Anu Aiyengar: Yeah. Financing has only been one of the inhibitors because, when you step back and look at it, rising inflation, rising interest rates, war that continues, geopolitical tensions, and the lasting impact of the pandemic on the consumer, on supply chain, a future of work, future of spending, so these are some pretty meaty questions and uncertainty is not a good thing for M&A. The VX has been about 25 or so, whereas pre-pandemic it was 15. So you little bit need a return to being able to predict what the future is. Otherwise, it takes a pretty courageous buyer. But having said that, I do think it's the best of time for a strategic who is wellcapitalized, because they are not dependent on financing, and you can just use your balance sheet without putting it at stress and still do deals. But for the sponsors, it's really been a little bit of a barbell. Some people who are willing to over equitize and say, "When the financing markets come back, I'll kind of recap it," and some who are just risk off and they're going to wait for the leverage finance markets to come back, they're going to wait to have more clarity on the future and figuring out where exactly growth, inflation, interest rates, and unemployment, the Rubik's cube lands.

Romaine Bostick: Well, I can understand why a publicly traded company that's looking to buy might be a little hesitant in this environment because they, of course, have to try to justify that to shareholders at a time where that uncertainty is there. For private equity and other buyers that maybe don't necessarily have that spotlight on them in that same way, does this give them, I guess, more of a leg up? Does this give them more opportunity to come in and swoop up some of these companies?

Anu Aiyengar: There is a little bit of an advantage, but I think the same thing gets reversed by the financing markets because, for strategics who last year maybe felt valuations are too high, I'm actually losing to sponsors or I'm losing to the IPO market, yes, you have to justify the deal to your shareholders, but it's still a better buying environment over this past six months and the next 12 months rather than it was in the previous 18 months. For the sponsors, I think it's a little bit of many people will wait to see that the leverage finance markets are there, other than the ones that I said. There's about dozen or so of them who are willing to over equitize and still do deals.

Speaker 4: Clarity is key here in terms of people being willing to engage in transactions. Generally speaking, though, we have this uncertain environment and we have billion dollars worth of deals to announce on Merger Monday. Those obviously took place in a time that was uncertain. Does the uncertainty that we're seeing drag out the amount of time it takes to get a deal done or are both sides more incentivized to get it done quickly before things change again?

Anu Aiyengar: Yeah. I think, in general, sellers, if you are ... Let's split it up into sellers and buyers. Sellers, some people are getting realistic, whereas some people need a bit more time to get realistic because you're still looking in the rear view mirror and saying, "I was just valued at a price that was X high, Y high." And if you look at overall, depending upon the correlation between what was the growth of the company and the profitability of the company, the re-rating has been affected pretty materially by that. If you were all growth, no profitability, you got rerated pretty severely, 60%, 70%, 80% down. If you were decent growth, decent profitability, you still got re-rated but a bit less. And so if you're a seller in the bottom category, where you had very high growth and not a lot of profitability, you really have to step back and think, "What do I want my future algorithm to be? When do I think I can go public? How much cash do I need?" And that takes a little bit time to wrap your head around. Buyers, the courageous buyer who is willing to take a bit of risk, they are going in there and doing the deal and some of the best deals for these buyers will get done over the next six months. Most buyers wait to catch the bottom and that becomes more challenging.

Ed Hammond: And talk to us about the seller mentality here because, if I'm a seller and I'm looking at my 52-week high, I'm probably a long way off it and I probably think I have a good shot at coming back to it. Maybe my ego tells me I definitely have a good shot at coming back to it. So how do you get them comfortable with the idea that maybe they're going to sell now and maybe they're going to go for way under that 52-week high?

Anu Aiyengar: Yeah. Seller is not proactively putting them up for sale. So if you're a buyer, you want to buy that company, go knock on the door real nice and ask real nice, engage, get to know them. And at the time period when the seller's mindset changes, you want to be right there so that they can engage with you. So many of these deals that happened, there were some driver or motivation. There are those sellers who say, "You know what? I can see the world pretty clearly and, today, I want to be the first to go out to the market and catch the buyer before some of these buyers have done a large deal and they're going to be offsite." So you get all flavors, but the majority of sellers today are still not accepting reality and the majority of buyers are too greedy, waiting for the bottom.

Ed Hammond: I was hoping you were going to say we were just going to see a wave of hostiles and force to sell us out.

Anu Aiyengar: Friendly unsolicited.

Ed Hammond: That's polite hostile. I have an activist question. I just want to obviously plug, as well, our activist conference tomorrow, running all afternoon here at Bloomberg. Activists have been such an important component of the overall M&A market going back really a decade now, but I wonder now, with all this uncertainty that Scarlet talked about, how do they play it? How do they get into stocks when you could see this sort of precipitous decline from here on out, even if they have a good idea?

Anu Aiyengar: Yeah, that's a really good question because activism as an asset class has really matured. So now, you could no longer say every activist wants the same thing. There are some who are opposing a transaction, like you saw in Cooper, and there are some who are saying, "Go do a deal, corporate clarity, change the CEO, buy back shares, don't buy back shares." So you see every flavor. And the majority of sectors that they've been targeting, 50% of it is industrials, consumer, and tech.

Romaine Bostick: We only have a couple minutes left here. I'm curious about the potential for more cross-border deals, particularly in an environment that I think some people have said has maybe gotten a little bit more stringent, regulatory environment, meaning antitrust, whether it's here or in Europe here. Do you think that that potential antitrust risk could actually be an impediment?

Anu Aiyengar: You are absolutely right. Cross-border volumes, from its heyday of 2015, '16, have come down quite a bit. So if you're like a China and Europe outbound or US as a target, both have come down because, if you're a US company, you're saying, "Well, maybe I'd much rather sell to another US company than take the antitrust risk." My expectation that, with the strength of the dollar, US outbound to parts of Europe and some strong European companies looking again at the US, that should come back.

Romaine Bostick: Anu, great to have you here in-person. Our thanks, of course, to Ed Hammond, as well. Anu Aiyengar is Global Co-Head of JP Morgan's M&A business here. A great conversation here and, once again, our thanks to our senior deals reporter, Ed Hammond.

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Dwayne Lysaght

Co-Head of EMEA M&A

Learn more about the regional M&A landscape from Dwayne Lysaght, J.P. Morgan’s Co-Head of EMEA M&A. 

Francine: Economics, finance, politics, this is Bloomberg Surveillance: Early Edition. I'm Francine Lacqua, here in London. So M&A volumes fell materially in 2022, but we're well ahead of averages for the last 10 years, providing optimism as we start the year. Well, that's the view of our next guest. He's Dwayne Lysaght. He is co-head of the EMEA M&A at J.P. Morgan. Thank you, Dwayne, for joining us. You always make us smart on what you're expecting the year to be and you're quite optimistic about the next 12 months. Why? 

Dwayne: Now first of all, thank you for having me on. And we are cautiously optimistic is what I would say. I think when you look at last year down 36% globally, down 36% in EMEA, but actually when you look at the long term trend, 8% ahead globally of the average and 2% in EMEA. So putting the year in context, 2022, that is, it was kind of an average year; not too hot, not too cold. In terms of this year, I think we see that continuing. I think it's going to be a relatively average year, probably flat overall and probably a year of two halves. A bit like last year in terms of the next six months could be tricky as things settle down, particularly equity valuations, the debt markets coming back, equity markets coming back to support those M&A transactions. And then we're hoping that that latter part of the year, latter six months say, will be kind of stronger in terms of announcements and general momentum, so that's how we see. 
Francine: Dwayne, so we're going to... I don't know how long you're expecting interest rates to be higher, but this is a new economic era. 

Dwayne: It is. 
Francine: And we could see this for the next decade. How much does this impact actually just the level of interest rate and leverage M&A and everything you have in the pipeline? 

Francine: Economics, finance, politics, this is Bloomberg Surveillance: Early Edition. I'm Francine Lacqua, here in London. So M&A volumes fell materially in 2022, but we're well ahead of averages for the last 10 years, providing optimism as we start the year. Well, that's the view of our next guest. He's Dwayne Lysaght. He is co-head of the EMEA M&A at J.P. Morgan. Thank you, Dwayne, for joining us. You always make us smart on what you're expecting the year to be and you're quite optimistic about the next 12 months. Why? 
: I think undoubtedly there's a transition period as frankly people get used to the higher rates, the lack of availability maybe of debt, but the debt markets, they'll come back and when we actually... We look back over a 20-year period when we saw interest rates at these levels, the actual levels and volume put through each year were equivalent to some of the best years we've ever had; 2006, 2007, et cetera, so we're not overly [inaudible 00:02:02]. And to put it in context, the likes of a 2006, 2007 type year, was well ahead of the strongest year you've had very recently, which as you know was 2021. So again, cautiously optimistic, not getting too far ahead of ourselves, but we see things coming back reasonably strongly. Dwayne: Now first of all, thank you for having me on. And we are cautiously optimistic is what I would say. I think when you look at last year down 36% globally, down 36% in EMEA, but actually when you look at the long term trend, 8% ahead globally of the average and 2% in EMEA. So putting the year in context, 2022, that is, it was kind of an average year; not too hot, not too cold. In terms of this year, I think we see that continuing. I think it's going to be a relatively average year, probably flat overall and probably a year of two halves. A bit like last year in terms of the next six months could be tricky as things settle down, particularly equity valuations, the debt markets coming back, equity markets coming back to support those M&A transactions. And then we're hoping that that latter part of the year, latter six months say, will be kind of stronger in terms of announcements and general momentum, so that's how we see. 

Francine: Dwayne, so we're going to... I don't know how long you're expecting interest rates to be higher, but this is a new economic era. 

Dwayne: It is. 
Francine: And we could see this for the next decade. How much does this impact actually just the level of interest rate and leverage M&A and everything you have in the pipeline? 

Dwayne: I think undoubtedly there's a transition period as frankly people get used to the higher rates, the lack of availability maybe of debt, but the debt markets, they'll come back and when we actually... We look back over a 20-year period when we saw interest rates at these levels, the actual levels and volume put through each year were equivalent to some of the best years we've ever had; 2006, 2007, et cetera, so we're not overly [inaudible 00:02:02]. And to put it in context, the likes of a 2006, 2007 type year, was well ahead of the strongest year you've had very recently, which as you know was 2021. So again, cautiously optimistic, not getting too far ahead of ourselves, but we see things coming back reasonably strongly. 

Francine: What are the specific sectors that you're most interested in? I know last year overall it was tech that really dominated it, and in Europe it was diversified industries. 

Dwayne: Exactly. And I think if we look at EMEA specifically, I think diversified given rotation of assets, consolidation, general fragmentation, we probably see that as one of the leading sectors. There's a lot going on in terms of energy transition, which I think benefits diversified industries, but obviously the energy sector as large as it is and wide as it is. 
Francine: And that's despite the war in Ukraine? 

Dwayne: I think so. And I think in some ways, because of it that actually people are looking at other opportunities and ways to generate that energy and provide to the customers. I think other sectors, your point on tech, I think globally, that is certainly going to be one of the leading sectors, same in EMEA. And it is really about the tech evolution that is occurring, the enabling of tech within older economy type of industries, diversified particularly. So we see that theme generally across the market. The other thing I'd add would be that sectors that haven't been as busy in recent years, maybe a healthcare, a fig, they tend to have a pop-up year every 2, 3, 4 years. And we probably see one or two of those coming back reasonably strongly for all the reasons you know. And that is people seeking opportunities for growth, consolidation and costs. 
Francine: In your many years experience of course, as a banker in M&A, is there good M&A compared to bad M&A? So the M&A that you either do out of desperation, or just because it looks attractive, and how do you not fall in that category when you're trying to make a deal? 
Dwayne: Well, I think there is a general caution around at the moment. So I think people are extra sensitive to exactly that point. So we're hoping that it is careful, well thought out, strategically led M&A that occurs. There's always M&A, which you and hindsight wish you maybe hadn't done the deal you didn't do, but that is with every cycle. And a lot of it often is not necessarily the deal itself, but the implementation afterwards and things change, environments change, et cetera, that make that implementation trickier. But we're hoping for good M&A. 

Francine: Well, we are. Everyone is hoping for good M&A, especially in the people involved. When you look at the different countries so is the UK again, are there opportunities in the UK, because of cheaper valuations, because of weakness in Pound compared to say a France or a Germany? 

Dwayne: Well, I think I'd answered that in two ways. I think we expect the likes of the UK to be a leading M&A generator in 2023. The big economies of France, Germany are never going to be far behind. They probably fell further back last year compared to the likes of the UK, despite the economic turmoil that we saw. So UK we expect to be strong, other leading economies as well. And I think the cross-border point driven in part by currencies, never a reason to do a deal, a strong currency, but it will help people to get the deals done, make the financials work. And that cross-border element, we are watching carefully. Last year was a slightly muted cross-border year. This year we expect it to be stronger. 

Francine: Every year, someone comes on and says, "This is the year where we can see activist shareholders in Europe," much like we do in the US. Is there attractiveness, just because it's a smaller capital pool in Europe, and how does that change? Are we going to see big investors trying to shake things up in Europe? 

Dwayne: Well, I think we've seen one or two of them in recent days as you know. Looking at it last year, definitely more muted. We had 77 campaigns in EMEA publicly versus 98 in the year before. We think a lot of the activist campaigns were sitting in the background, a lot of work being done, a lot of it in private. We expect more of that to come to the foreground in 2023. So I think the prediction, if you like, would be more public activism occurring for some of the reasons you're mentioning in terms of particularly driving equity valuations, maybe forcing companies to rethink about their structure, what should be spun out, maybe be sold off, or indeed consolidation opportunities that management need to get on with. 

Francine: Is this a chief executive's worst nightmare? Someone buying shares and thinking they can do a better job. This is like backseat driving. 

Dwayne: It is definitely tough for management teams. [inaudible 00:06:32] often managing teams are actually quite well prepared for it, and they recognize that actually activists, they are a form of investor which you listen to, you engage with. Hopefully there's something to be shared and gained on both sides, but at the end of the day, focusing on the strategy and the performance and the delivery to shareholders. 

Francine: All right, Dwayne, thank you so much for joining us. So Dwayne Lysaght, co-head of EMEA M&A at J.P. Morgan.
Francine: What are the specific sectors that you're most interested in? I know last year overall it was tech that really dominated it, and in Europe it was diversified industries. 

Dwayne: Exactly. And I think if we look at EMEA specifically, I think diversified given rotation of assets, consolidation, general fragmentation, we probably see that as one of the leading sectors. There's a lot going on in terms of energy transition, which I think benefits diversified industries, but obviously the energy sector as large as it is and wide as it is. 

Francine: And that's despite the war in Ukraine? 

Dwayne: I think so. And I think in some ways, because of it that actually people are looking at other opportunities and ways to generate that energy and provide to the customers. I think other sectors, your point on tech, I think globally, that is certainly going to be one of the leading sectors, same in EMEA. And it is really about the tech evolution that is occurring, the enabling of tech within older economy type of industries, diversified particularly. So we see that theme generally across the market. The other thing I'd add would be that sectors that haven't been as busy in recent years, maybe a healthcare, a fig, they tend to have a pop-up year every 2, 3, 4 years. And we probably see one or two of those coming back reasonably strongly for all the reasons you know. And that is people seeking opportunities for growth, consolidation and costs. 

Francine: In your many years experience of course, as a banker in M&A, is there good M&A compared to bad M&A? So the M&A that you either do out of desperation, or just because it looks attractive, and how do you not fall in that category when you're trying to make a deal? 

Dwayne: Well, I think there is a general caution around at the moment. So I think people are extra sensitive to exactly that point. So we're hoping that it is careful, well thought out, strategically led M&A that occurs. There's always M&A, which you and hindsight wish you maybe hadn't done the deal you didn't do, but that is with every cycle. And a lot of it often is not necessarily the deal itself, but the implementation afterwards and things change, environments change, et cetera, that make that implementation trickier. But we're hoping for good M&A. 

Francine: Well, we are. Everyone is hoping for good M&A, especially in the people involved. When you look at the different countries so is the UK again, are there opportunities in the UK, because of cheaper valuations, because of weakness in Pound compared to say a France or a Germany? 

Dwayne: Well, I think I'd answered that in two ways. I think we expect the likes of the UK to be a leading M&A generator in 2023. The big economies of France, Germany are never going to be far behind. They probably fell further back last year compared to the likes of the UK, despite the economic turmoil that we saw. So UK we expect to be strong, other leading economies as well. And I think the cross-border point driven in part by currencies, never a reason to do a deal, a strong currency, but it will help people to get the deals done, make the financials work. And that cross-border element, we are watching carefully. Last year was a slightly muted cross-border year. This year we expect it to be stronger. 

Francine: Every year, someone comes on and says, "This is the year where we can see activist shareholders in Europe," much like we do in the US. Is there attractiveness, just because it's a smaller capital pool in Europe, and how does that change? Are we going to see big investors trying to shake things up in Europe? 

Dwayne: Well, I think we've seen one or two of them in recent days as you know. Looking at it last year, definitely more muted. We had 77 campaigns in EMEA publicly versus 98 in the year before. We think a lot of the activist campaigns were sitting in the background, a lot of work being done, a lot of it in private. We expect more of that to come to the foreground in 2023. So I think the prediction, if you like, would be more public activism occurring for some of the reasons you're mentioning in terms of particularly driving equity valuations, maybe forcing companies to rethink about their structure, what should be spun out, maybe be sold off, or indeed consolidation opportunities that management need to get on with. 

Francine: Is this a chief executive's worst nightmare? Someone buying shares and thinking they can do a better job. This is like backseat driving. 
Dwayne: It is definitely tough for management teams. [inaudible 00:06:32] often managing teams are actually quite well prepared for it, and they recognize that actually activists, they are a form of investor which you listen to, you engage with. Hopefully there's something to be shared and gained on both sides, but at the end of the day, focusing on the strategy and the performance and the delivery to shareholders. 

Francine: All right, Dwayne, thank you so much for joining us. So Dwayne Lysaght, co-head of EMEA M&A at J.P. Morgan.