Dealmaking booms when markets are stable and businesses are feeling good about the economy and access to financing. When conditions deteriorate, confidence flags, and the number of companies going public or pursuing takeovers drops. That's what is happening now.
Details, details: The number of global initial public offerings, or IPOs, has dropped by 54% so far this year compared to 2021, according to data from Dealogic provided to Before the Bell. Mergers and acquisitions have plunged by 25%.
The drop-off comes as central banks around the world hike interest rates, leading to higher borrowing costs and tighter financial conditions. Decades-high inflation is also feeding recession fears as consumers begin to deplete their pandemic-era savings, roiling markets and generating questions about how long the economic recovery can last.
In this environment, companies that had wanted to execute IPOs or sell their businesses are staying on the sidelines — preferring to wait for a market recovery when they could raise more money from investors.
See here: This week, Walgreens Boots Alliance announced that it had changed its mind on plans to sell Boots and the No7 beauty brand.
"Since launching the process, the global financial markets have suffered unexpected and dramatic change," the company said in a statement. "As a result of market instability severely impacting financing availability, no third party has been able to make an offer that adequately reflects the high potential value of Boots and No7 Beauty Company."
Italian oil and gas company Eni recently postponed the IPO of Plenitude, its renewables and retail business.
"The volatility and uncertainty currently affecting the markets require a further phase of monitoring," the company said.
Activity could pick up again after the traditional summer lull. Volkswagen said Wednesday that it's still working toward an IPO for Porsche in the fourth quarter. But that deal will largely depend on how the situation plays out from here.
At this point, investors want companies that have dominant market positions and strong cash flows, according to Willem Sels, the chief investment officer for HSBC Global Private Bank. That means younger companies going through the IPO process may look less attractive.
"What people are looking for currently are companies that are really in the quality space — the well-established companies," Sels told me.
Feeling the pain: Big banks cashed in during last year's record dealmaking streak when markets were still hot. Now, they're hauling in way less from their advisory businesses. It's one reason shares are struggling. The KBW Bank Index, which tracks US lenders, is down 22% year-to-date, compared to a near 20% decline in the S&P 500.
"All that fee income, it doesn't come in any more," Sels said.
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