Global and Regional M&A Trends for Q2 2023

In this week’s special episode, we're joined by SS&C Intralinks Co-Head Ken Bisconti, who provides an exclusive preview of global and regional M&A activity featured in the newly published Deal Flow Predictor for Q2 2023.

Download the Q2 2023 DFP here.

Dealcast is presented by Mergermarket and SS&C Intralinks.

Transcript

[MUSIC PLAYING] JULIE-ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie-Anna Needham, a business journalist who's been covering M&A for a decade. In this week's special episode, we're looking at the latest Intralinks' deal flow predictor, which is based on data from the company's due diligence platform and highlights a number of trends in M&A. I'm joined by KEN BISCONTI who is co-head of SS&C Intralinks to discuss the findings from the second quarter edition of the deal flow predictor.

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Hi, Ken. Thanks for joining me today and good to speak to you again.

KEN BISCONTI: Good to speak to you, Julie-Anna. Thank you.

JULIE-ANNA NEEDHAM: So let's start with an overview of M&A activity globally. What trends have you seen during the beginning of 2023? And what should we be expecting for the second quarter of this year? And how do you anticipate it, comparing to the first quarter?

KEN BISCONTI: All great questions, Julie-Anna. I would say early in 2023, we're continuing to see cautious optimism and resilience among the big dealmaker community. M&A volume on our platform, the Intralinks' platform started in 2023 to exceed volume compared to last year and nearly on par with 2021. Of course, there's a lot of competing factors in the marketplace right now. I don't think that that's a surprise to most of our investment banking and corporate professionals.

What we're seeing as an organization and a platform running thousands and thousands of deals is that actually, due diligence periods are getting longer. On the platform, we're seeing an increase in the number of deals that are started, but then paused, and then restarted as diligence periods lengthen. And this activity is happening in an uncertain market that's still feeling effects from the conflict in Ukraine and supply chain issues through rising interest rates intended to tamp down rising inflation to double digit declines, and M&A coupled with the decline of SPACs, and IPOs.

And it's a period of both uncertainty but also this change is causing activity. Even as companies in Eastern Europe reorganize, as maybe they choose not to have business dealings with Russia as an example, that creates a spin out activity. If you think really just about the last two to two and a half years, we've essentially moved from crisis to crisis. And volatility is required both strategic and private equity deal makers to be very exacting in the deals that they engage in and the diligence expended in reviewing those transactions.

Now, on your question just about quarter to quarter activity. You may recall or listeners may recall in Q1, we were projecting 5% to 10% increase in announced deal volume. And going into Q2, we actually are projecting slightly even more positive results to that from a year over year perspective. But I would have to temper that, again, with-- the uncertainty that we see in the overall market gives a little bit of change to the way that we interpret our DFP data. So this deal flow predictor data, often, is usually based on projected six months out activity. The deal goes into diligence. And then six months later, we tend to see the resulting announcements.

Just given some of the uncertainty in the market, and even just what happened in Q1, and the banking liquidity crisis, when we see an increase in DFP activity in Q4, that may or may not translate into the expected announced results that we would normally in a normal market see. So our expectation is that we expect to see year-on-year growth and in fact, close to 10% year-on-year global increase in volume announced. But again, let's just temper that with some of the uncertainty that still exists in our market.

JULIE-ANNA NEEDHAM: Great. Thank you. And now, looking at the different regions and starting off with Asia-Pacific, can you talk us through what's been happening in the APAC region? And what have been the headwinds there?

KEN BISCONTI: Sure. Asia hasn't been immune to the global challenges we're facing, including inflationary pressures. And despite that, Asia-Pacific had a strong showing in the second half of last year. Q3 saw exceptionally high early-stage activity, which provided solid competition to what happened in Q4. Now Q4 2022 volume was the second highest that we've seen on the trailing 24-month basis with all major markets, including Hong Kong, India, Japan posting double-digit gains quarter-on-quarter.

Now, in China specifically, M&A deals are struggling to emerge from a year that saw the lowest level of activity since 2014. Largely, the result of a strict zero-COVID policy that included a two-month lockdown in Shanghai, of course, the financial capital, which damaged investor confidence. Now, we expect deal volume in China to pick up in the second half of 2023. And overall, we anticipate Q2 '23 announced volume in APAC to be nominally flat with marginal potential downside risks against last quarter's volume but with a higher resistance level to be reached on a quarter-on-quarter, year-over-year compare.

JULIE-ANNA NEEDHAM: Thanks, Ken. So how does that differ to the EMEA region, which looks like a really mixed picture? What activity and trends are you seeing there? And will the Russia-Ukraine conflict pose further issues?

KEN BISCONTI: Well. If AP was maybe challenged by the shutdown through zero-COVID, what we see in EMEA as you just mentioned, is a region that is on the front lines of the Ukraine conflict. Now, despite the humanitarian costs arising from the conflict, on a grander, regional scale, dealmakers are still actively investing and expanding into EMEA. And that could signal that they don't anticipate an expansion of the conflict.

Like Asia-Pacific, EMEA had a strong front-end showing in Q4 with regard to activity. October, there was the highest deal volume that we saw on a-- initial starting deal volume that we saw on a trailing 24-month basis. And November was the fifth highest over the same 24-month trailing basis. So those factors tell us to anticipate marginal uplift in second quarter '23 announced volume, now, quarter-on-quarter and maybe even more material uplift in the plus 10% range year-on-year. To round out EMEA dealmaking, we saw strong regional performers in France, Israel, the Netherlands, and Spain. While the UK is expected to outperform in the banking, retail, and tech sectors as companies remain focused on expanding their digital capabilities.

JULIE-ANNA NEEDHAM: Thank you. And looking towards the West now, North America is forecasting negative growth according to the deal flow predictor. Can you explain why that is, please?

KEN BISCONTI: Well, yeah. Unfortunately, North America has seemed to bear the brunt of downside movement in Q4 pre-announced activity where we're expecting Q2 '23 volume to be flat against Q1 volume with even further negative movement against Q2 2022. Now not surprising to this audience, I'm sure the biggest headwinds we've seen in the U.S. has been the rapid near-immediate ascent from an ultra low interest rate environment to our current state, coupled with inflationary price increases, and up and down periods of whether that was to arrest, or not.

Deals are certainly still getting done. And we don't forecast a persistent negative trend in the region. But there's an acclimation and reassessment period that's being priced into M&A strategies that we believe will eventually stabilize. In fact, there were indications that it was beginning to stabilize until we saw the bank liquidity issues in March. Now, we'll have more insight on this as Q2 wraps up. And we expect rate increases to begin to temper. And inflationary pressure will steady. And those factors should lead to more inorganic engagements in the U.S.

JULIE-ANNA NEEDHAM: Thanks. And now looking at Latin America, can you tell us more about the trends in the Latin American region? And what hurdles this year have impacted on the markets there?

KEN BISCONTI: Well, Latin America trended similarly to EMEA in terms of seeing nominal growth forecasted in Q4 compared to Q3 and more concrete positive performance on a quarter-on-quarter over year basis. We're forecasting Q2 2023 volume to be flat against last quarter with room for both marginally negative and positive movement. Generally, the midpoint of that movement is plus 1% so relatively flat. The region competed against some strong quarters in 2021. But the tail end of the year, of last year saw a spike in volume. And as such, we're forecasting mid-range upside against last year's Q2.

In the region, Brazilian elections sparked volatility in the territory. But the region actually performed relatively well despite that. One factor we're keeping an eye on is the Argentinean debt inflation crisis and how that impacts overall regional performance. But we're seeing strong performance in countries like Colombia and Mexico, while Brazil is seeing weak quarter-on-quarter performance but a much stronger activity year-on-year.

JULIE-ANNA NEEDHAM: Thanks. It feels like there are a lot of moving parts in geopolitics and the macroeconomic environment with each region facing a different set of challenges. Can we bring all of that together? And can you talk through some of the possible challenges we can expect for the remainder of the year? And perhaps we can end on a high note on, is there a feeling of optimism?

KEN BISCONTI: Yeah. See now, it's interesting as you say. I look at the DFP graphs. And they look like a checkerboard of different colors where we would have seen in let's say the second half of 2021, it was like green all over the place. We've got greens, yellows, reds all over the board. And look, there are ongoing challenges, including regulatory and antitrust issues in North America as well, which remain top of my concerns. Deals in AI defense infrastructure will continue to be scrutinized closely. And as we were saying earlier, inflationary concerns are going to make both buyers and sellers operate and engage in M&A more judiciously.

Recent banking failures and the high cost of capital are going to put some tech startups in a position to be acquired. That's new news. That could be a boon for PE firms, many of whom can often execute quicker than their strategic counterparts. And this could also create new M&A activity for bank assets that will need to be redeployed elsewhere as certain banks are absorbed by others. And we see additional activity spin out as a result.

However, given all of this, as I said previously, there's still palpable optimism in the dealmaking market. Dealmakers are increasingly comfortable in the current environment. And there should be fewer surprises in the banking sector. And if there should be no more surprises, we expect this optimism to continue. We have savvy acquirers, many of who are flush with cash and have strong balance sheets that are waiting on the sidelines. And while deals are moving forward slowly but surely, we see these valuations that are coming down to Earth, and some stabilization in the cost of capital, and fewer, hopefully, no more surprises in the banking sector. We expect higher volumes of deal activity to continue to grow in the second half.

JULIE-ANNA NEEDHAM: Great. Ken, thanks very much.

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That was Ken Bisconti, co-head of SS&C Intralinks. Thanks for listening to this week's special episode of Dealcast presented by Mergermarket and SS&C Intralinks. Please rate, review, and follow the podcast. You can find us on Apple podcasts, Spotify, or look out for your Mergermarket news alerts. For more information, have a look at our show notes. Join us next week for another episode.

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