M&A Is Sputtering. Blame Inflation, Rates, and Volatility.
It has been a big year for newsmaking M&A, but that hasn’t translated into a big wave of deal activity.
July volumes for mergers and acquisitions are down 57% on a dollar basis, while the deal count is off 53% year over year, according to Goldman Sachs data.
This sharp drop in activity comes despite recent headline-making deals such as JetBlue Airway JBLU 0.00% ’s (ticker: JBLU) acquisition of Spirit Airlines SAVE –0.16% (SAVE) and Amazon.com AMZN –1.24% ’s (AMZN) plans to buy 1Life Healthcare (ONEM), parent of One Medical, not to mention the litigious saga over Elon Musk’s Twitter TWTR +3.56% (TWTR) bid.
Bank executives lamented the M&A slowdown in earnings calls last month, and merger bankers are bracing for bonuses shrinking by as much as 25%, says compensation consultant Johnson Associates.
Reasons for the M&A drop are manifold. While there may be logical reasons for companies to merge, market volatility makes it difficult to agree on price. The Cboe Volatility IndexVIX –1.35% , or VIX, stood at 24 in July, up from 17 a year ago. Deals have also grown more expensive to finance. High-yield bond yields hit 7.98%—double from a year ago. Investment-grade bond yields have more than doubled from last year and now stand at 4.6%, according to Goldman data.
While Goldman is bearish on deal making in the short term, expecting an 18% drop in activity over the next year, the bank is optimistic about a turnaround. “As those strains on lending ease and as volatility subsides over time, likely many of these delayed transactions proceed to announcement and closing,” wrote Richard Ramsden, its head of financial research.