Giant Merger Deals Stage a Comeback
A flurry of tie-ups, led by Capital One, raises the prospect of an M&A rebound
The animal spirits are stirring on Wall Street.
A spurt of megadeals signals a potential revival in mergers and acquisitions after last year’s slump. But dealmakers caution that the rebound could prove fragile.
Led by Capital One Financial’s $35.3 billion purchase of Discover Financial Services DFS 2.41%increase; green up pointing triangle, buyers have unveiled 11 deals worth $10 billion or more this year, excluding debt, according to Dealogic, a data provider. That makes this one of the busiest starts to the year for monster takeovers this century.
On Thursday, Home Depot said it was making a big bet on SRS Distribution, a private-equity-owned roofing distributor, adding to the rush of deals.
The flurry of supersize acquisitions reflects a broader recovery. Last year, overall dealmaking value hit a decade low. Higher borrowing costs due to the Federal Reserve’s rate hikes made it more expensive to fund acquisitions, while stock-market swings challenged the ability of buyers and sellers to agree on price.
But global activity has resurged and total deal value is up 24% so far this year to $725.8 billion, bolstered by steadier interest rates and rising stock prices.
“History shows we are in the early innings of a cyclical M&A rally,” said Andre Kelleners, the head of M&A for Europe, the Middle East and Africa at Goldman Sachs. He pointed to a halving in deal volume in the past two years.
The slew of giant deals shows some corporate managers and directors are regaining their appetite for risk. Bigger deals carry a higher risk of public failure—in areas such as write-downs, lower stock prices or unhappy shareholders—if promises to cut costs, boost profit and integrate businesses fall flat.
The $35 billion acquisition of Ansys by Synopsys is the software developer’s biggest deal ever and the second-largest this year. The Sunnyvale, Calif.-based buyer is targeting $400 million in annual cost savings and more than $1 billion a year of extra revenue, if all goes to plan.
Some private-equity firms are also starting to bet big again. After a fallow 2023, industry executives face pressure to deploy the mountains of capital they have raised from investors, so they can start generating returns and pave the way to raise new fee-generating funds.
In February, buyout firms including Stone Point Capital and Clayton, Dubilier & Rice agreed to acquire the bulk of Truist Insurance that they didn’t already own, in a deal that generated $12.6 billion of proceeds for the seller, Truist Financial.
Meanwhile—in another bid that is included in the Dealogic tally, but one that is far from certain to go through—Apollo Global Management has offered $11 billion to buy Paramount Global’s film and television studio, The Wall Street Journal has reported.
A pullback in borrowing costs has made it easier to generate returns by funding buyouts with debt, although interest rates remain elevated compared with prepandemic levels.
Aiding the recovery: Banks are lending again, after belatedly selling off tens of billions of dollars of leveraged-buyout debt that they had been stuck with.
“Traditional lending is coming back to some extent on the megadeals front,” said Neil Barlow, a private-equity partner at the law firm Clifford Chance. Still, it is nowhere near what it was before the pandemic, he said, meaning smaller deals for stakes in companies are likely to remain prevalent until rates fall further.
Illustrating that dynamic, in February, KKR said it would buy half of Cotiviti from another buyout firm. The previous majority owner, Veritas Capital, had tried to sell the whole business in 2021 and 2022.
This time, banks including JPMorgan, Morgan Stanley and UBS provided about $5 billion in debt financing. Compared with last year, when the company tried to do a similar deal with another prospective acquirer, the banks’ funding was more than 3 percentage points cheaper than the rates previously offered by private credit funds, people familiar with the matter said.
The M&A recovery, however, remains vulnerable. With elections due in the U.S. later this year, and likely in the U.K. too, prospective buyers and sellers could sit on the sidelines until outcomes are decided and resulting economic policies and regulation start to emerge.
The macroeconomic backdrop could also throw up surprises, especially if consensus expectations for a series of rate cuts by the Fed prove wide of the mark. “All bets are off if inflation remains sticky and interest rates stay higher for longer or unexpectedly start to rise again,” said Kelleners of Goldman Sachs.
Another sign of fragility is a lopsided global market. The U.S. makes up about 57% of all M&A volume this year compared with 45% for all of 2023, according to Dealogic, and all but one of this year’s jumbo deals. Asian M&A is down substantially from a year earlier, hit in part by China’s economic slowdown, while European M&A volumes are also anemic.
An early crop of giant deals isn’t always a good predictor of the year ahead, either. Sometimes, as in 2009 and 2010, the year starts strongly but peters out. In other years, like 2016, a quiet start gives way to a busier full year.