CJ Doherty: Welcome to the Lending Lowdown. I'm CJ Doherty, head of market analysis at LSEG LPC and I'm delighted to be joined by Matt Toole, director of deals intelligence here at LSEG. We have a little bit of a change up today. As up to this point, our podcast had been primarily focused on lending activity, you know, whether it be private credit or the syndicated loan market. But today we're going to focus on M&A activity. As you know, many market participants are currently trying to gauge where M&A deal flow is at and where it's headed. Of course, all this is still very related to the loan market as a chunk of M&A activity is ultimately financed via loans and indeed, bonds. And so with all this in mind, I pulled in our resident expert on all things M&A. So welcome, Matt. Thanks for joining me. It's great to be here. Okay, Matt. So let's start with the biggest headline in the last week, the fallout from the collapse of Silicon Valley Bank and Signature Bank is still reverberating throughout the broader markets. And worries persist around some other banks, even as of today, March 17. So, you know, from your perspective, has there been any visible impact on M&A yet? Or is it too early to tell?
Matt Toole: I would definitely say is too early to tell, you know, big kind of collapse of, of kind of major, major banking players is never a good thing for kind of market confidence, or kind of general kind of confidence in deal making. But I think it'll take a bit of time to figure out exactly kind of what the repercussions are of some of this kind of volatility that we're seeing, certainly in the banking sector. I think it's, it's, it's certainly something that is being closely watched, certainly in the technology community, which has been a huge part of the M&A story over the last number of years. But I think we'll put that in the too early to tell category at this point, and kind of see kind of how the After Effects and changes potentially to, you know, some of the, you know, kind of just general outlook on the market come into play here.
CJ Doherty: Okay, so we'll stay tuned for more on that. And next, like, obviously, we saw M&A activity tumble in 2022. You know, amid the market volatility and the economic uncertainty, what are you seeing on the M&A front overall, so far this year? You know, are there differences across regions,
Matt Toole: We, you know, we saw, you know, a pretty dramatic fall off in M&A last year, where, you know, we saw the, the the largest, you know, six month decline in M&A activity since we began tracking M&A 40 years ago. And so, you know, the impact of kind of the many different kinds of headlines in 2022, with, you know, kind of starting off the year with kind of war in Ukraine, and then moving into recession, fears, rising inflation, a very dramatic rise in interest rates, and some major stock volatility, can really, you know, kind of just shut down all the kind of dealmaking that we had been seeing you after the record that we saw in 2021. And that has spilled on into this year, we're now tracking at a decade low. So we're, this is a slow start for M&A since 2013, and it is pretty broad base, you know, steeply double digit declines, you know, around each of the regions, the Americas and Europe, you know, kind of kind of quite negative. And, you know, there's some different stories in some of the different countries where we are seeing some bright spots in Australia and Japan, but, you know, I think broadly, the, you know, the real factors that push down M&A in the latter half of 2022 have certainly spilled over into this year, and, and now facing some new, some new indicators, some new changes in the market, and obviously some some current events that we just spoke about.
CJ Doherty: Okay. Yeah, and against that backdrop, what you've described are valuations coming down are sellers willing to willing to transact at lower purchase multiples.
Matt Toole: And that is one of the the things that we have been observing is, you know, in the course of this slowdown, we have seen valuations come down about 100 100 basis points since the beginning of 2021, where we saw a high for some of the EBITDA multiples and some of the other multiples that we track. And so, you know, when we do have downturns and M&A, there are also often pockets of opportunity for, for buyers who are looking to to make a move, you know, obviously, you know, taking into account all the different pieces that go into deciding whether to transact and pursue a merger but, you know, one of the pieces that we were looking at, you know, in the run up and to, you know, the record year that we saw in 2020 21 Was it you know, very, very high multiple and really some some expensive deals happening and so, we have seen that come down, and I think that will certainly with all the other factors play into, you know, what might might come as we look into, you know, a, an increase in M&A, you know, potentially the, the latter half of this year or even into into 2024.
CJ Doherty: Okay, and as we dig a little bit deeper, maybe into the Did the underlying deal flow? What's the trend with regard to leveraged buyouts specifically?
Matt Toole: Yeah, so I mean, you know, look, the LBOs and private equity, you know, have been, you know, a very large percentage of M&A activity over the last two years, and we saw, you know, kind of record levels of capital raise. So private equity had, you know, tremendous levels of capital and some really record funds, which they were able to put to work through the pandemic, and well after, just because of the market conditions and the credit environment that was so favorable for private equity. And so, we are seeing a similar decline in private equity LBOs, this year, as we are seeing with the broader market, it might be outpacing the market a little bit, because, you know, many private equity transactions are certainly very, very focused on the financing equation and whether or not it makes sense to do the deal, you know, with the levels of capital needed and, and what financing might be available, whether it be bonds, and loans. So we have seen some pretty sizable transactions, you know, just to start off the year, but, you know, generally, I think private equity is kind of on the sidelines a bit trying to evaluate, you know, at what point does interest rates start to level out, you know, when can we think about financing, and maybe a potentially more new kind of kind of parallel, you know, even keeled way and kind of begin to look out and see some of those, those those targets we've had our eye on, do they make financial sense, and will be able to get the returns that we require? So I think, along with much of the M&A market private equity is probably in a recalculating mode, you know, looking to see kind of how deals might get done. And what am I required to get those deals done?
CJ Doherty: Okay. Yeah. And what do you see across sectors? You know, earlier, you mentioned the tech sector, but like, in general, what are the notable trends you're seeing,
Matt Toole: That technology has, has really been the large kind of driver of, of all things, and it's, from an M&A perspective, we're seeing, you know, large technology transactions. So, you know, you know, in semiconductors. In software, we're also seeing kind of tech adjacent transactions where, you know, healthcare companies are buying tech companies to help manage, you know, all their all their, their customers, and even customer data. So, you know, tech is growing and growing, as we've seen over the last couple of years, and last year accounted for a record kind of 25% of overall M&A activity, and that is kind of steeply fallen off, as you would imagine, with some of the the volatility that we've been seeing in some of the big tech names, and just in general, you know, kind of the focus on on, on those names, and there are going through, obviously, some major changes in cost cutting and job cuts as well. You know, we have seen a pretty big start to the year for healthcare, and that is really driven by a mega deal that was just recently announced from Pfizer, but you know, it was really 10 years ago when you kind of the impact of the Big Pharma and kind of group of companies really kind of kicked off this kind of this, this latest M&A cycle, you know, that was was really very dormant post financial crisis and all the big pharma companies were coming in in 2014 15, and making some really big transactions but, you know, obviously, with with healthcare and biotech and pharma, you know, that that is a pretty cyclical business and always looking for new things. So, we've seen kind of a pretty strong start to the year and healthcare also materials and industrials which kind of also plays into that infrastructure play which is is one that I think a lot of people are focused on and so, we are seeing kind of a very kind of a very slight increase year over year from materials and industrials. And actually, you know, a pretty strong number of deals happening in that space where that shows a much more broad based kind of pace of deal making across the middle market as as well as some of the large cap transactions.
CJ Doherty: Let's talk about size for a moment then you know, are you seeing differences in activity when it comes to M&A for large corporate versus middle market companies?
Matt Toole: Yeah, I mean, I think the the large cap kind of kind of mega merger was certainly a hallmark of of 2021 You know, and I think that will be an asterisk for for many years to come, you know, because the market conditions were just you know, so favorable for for M&A and we have seen that come down. So, right now, you know, the declines are really being led by that mega merger large cap, but we are seeing declines kind of an all size areas, but the mid market does seem to be a you know, kind of certainly outperforming the general market, mid market M&A is down by number of deals down 25% Compared to 42% for for large cap M&A. So, you know, I think there is always a very healthy kind of amount of activity happening in the mid market obviously, changes depending on overall conditions, but it does seem is that some of the smaller transactions and potentially some of the kind of the downstream effects of some of the big M&A deals where companies are selling off non core assets or, you know, potentially looking to spin off or sell, you know, some some portion of their business where we're seeing some of the smaller deals and also we're seeing some of the smaller private equity LBOs come into place as well.
CJ Doherty: Okay, great. And final question for you basically using your First of all, what's your outlook for the rest of the year, you know, what's in store for M&A deal flow?
Matt Toole: So we surveyed over 500 dealmakers at the beginning of the year to kind of see what they were thinking about as far as M&A. And there was some bullishness in that space. And I think looking at the beginning of the year, certainly, I think, many zoom Microsoft that we were gonna see, you know, a bit of a bright spot, I think, you know, economic conditions are still changing pretty rapidly. The CEO survey that came out just this week from the Conference Board also had the first uptick since 2021. And CEO confidence and M&A is very much driven by confidence. Now, I think some of the events of the last week or so, you know, might have a an impact on that. And I think, you know, as I mentioned earlier, you know, the recalculation of what, to all the different changes that we've seen in market conditions, you know, what does that mean, for my deal making playbook? You know, I think many advisors, you know, bankers, lawyers, lenders are, you know, certainly busy working with customers and clients to say, you know, kind of what, what are some of the kind of feasible options that might happen? Or what are the things that need to happen for us to potentially do a deal, but I think, you know, I think we'll probably continue to see a good amount of pause for certainly the first half of this year, hopefully see some, some more studying and some of the economic indicators, you know, that I mentioned before with inflation, you know, with interest rates, potentially living leveling out, potentially really putting into bed, whether or not we're gonna have a recession or not, and then hopefully begin to see, you know, some more dealmaking potentially in the latter half of the year, certainly for some companies taking advantage of the kind of the lower valuations and you know, just the general opportunity that sometimes comes from a downturn.
CJ Doherty: Okay, so some optimism there for for later in the year in terms of deal flow, and much to monitor. And on that note, I think we'll we'll wrap up for today. Matt, will keep up with your M&A coverage in the coming months in order to stay abreast of the key trends in the market. And thanks very much for joining me today. And thank you all for tuning in. I invite you to check out lseg.com backslash deals intelligence. For more M&A insights and analysis. I'm CJ Doherty. Subscribe to the Lending Lowdown on your favorite podcast platform.
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