M&A Plunged in June, Dealmakers Paralyzed by Uncertainty

Uncertainty about a wide range of geopolitical issues paralyzed dealmakers in June, lowering the volume of completed middle-market transactions to levels last seen in recession-ridden 2009. Participants in Mergers & Acquisitions’ monthly survey attributed the deepening M&A slump to concerns about the upcoming presidential election in the U.S., the vote by Britain to leave the European Union, the economic slowdown in China and terrorism around the world. Not all the news was bad, however, with the June survey results showing some areas of increased activity and predictions that the next 12 months will be healthier than the next three. (See related chart, 3-Month Forecast, 12-Month Forecast.)

The volume of completed middle-market transactions plummeted in June, with merely 85 deals closing in the month, down from 109 in May, and down from 171 in June 2015, according to data from Thomson Reuters. The volume of completed deals has been declining all year.  (See below for a list of selected deals that closed in June.) 

The results from our monthly survey were mixed. In positive developments, the composite score on the M&A Conditions Index (MACI) rose to 52.3 in June, up from the 48.7 reading in May. (See related chart, M&A Conditions Composite, June 2016). Divestitures resurfaced in June, which boosted the MACI reading. (See related chart, Month to Month Trends.) Large corporations, especially in the consumer goods sector, have been shedding slow-growing assets to focus on fast-growing brands. 

Also encouraging, credit loosened, according to survey participants. For the first time since September, the component that measures the availability of financing moved into expansion territory with a score of 51.9. Financing availability hit an historic low earlier in the year, when it dropped to 35.7 in February.

In negative developments, signed letters of intent remained in contraction, reinforcing the idea that there are still obstacles to closing deals, including pricing disparities between buyers and sellers.

Another negative note was sounded by the tech sector, an industry that often withstands downturns in overall M&A. The mid-June announcement by Microsoft Corp. (Nasdaq: MSFT) that it would buy professional social network LinkedIn Corp. (NYSE: LNKD) for $26.2 billion led analysts to predict a wave of large-cap Internet deals ahead.  But in the middle market, dealmakers gave tech a 3-month outlook score of 48.4 on the MMP, the lowest of all six sectors we measure on the index and the lowest score the technology, media and telecom (TMT) sector has ever received. Some poll respondents said that the influx of large, public corporations into non-traditional sectors may keep small companies out of the tech mix. Others attributed the dim outlook to too much money chasing too few deals in the tech world, where valuations have been high in recent years.

Overall, the middle market may see a return of activity later in 2016. Most sectors garnered higher scores for the 12-month outlook than the three-month outlook. (The exception was the consumer good and retail sector, in which dealmakers exhibited more faith in the short term.) Whichever party wins the presidential election in November, the conclusion of it is expected to bring a return of certainty to transactions, with most sectors expecting higher levels of dealmaking in the fourth quarter.

Editor’s Note on Methodology:

The MACI is a composite index of mergers and acquisitions activity in the U.S. It is the result of the Mergers & Acquisitions survey of approximately 250 executives in private equity firms, investment banks, lenders and advisor firms to track activity such as deals announced and deals completed, as well as acquisitions and divestitures. A reading of over 50 indicates an expansion relative to the prior month, and a reading below 50 indicates a contraction.

The MMP is a monthly sentiment indicator for the outlook of M&A activity and conditions. MMP results are presented as rolling aggregate indicators for both three- and 12-month outlook periods for macro M&A issues as well as for individual industry sector issues in healthcare, consumer/retail, manufacturing, energy, and technology/media/telecommunications on a monthly rolling basis. A diffusion index is produced by calculating the sum of percentages of those indicating on survey responses that describe a change in sentiment for three and 12 months (e.g., increase/positive, decrease/negative, or no change/neutral) to arrive at three-month and 12-month aggregate index values that are then averaged to create a total composite for the month. A reading of over 50 indicates an expansion relative to the prior month, and a reading below 50 indicates a contraction.

In addition to our monthly surveys, Mergers & Acquisitions uses data provided by Thomson Reuters about transactions that fulfill several requirements: Deals must have a value of roughly $1 billion or less; they must be completed (not just announced) within the timeframe designated; and they must include at least one U.S. company in the role of buyer and/or seller. Excluded from our completed deal charts are: recapitalizations; self-tenders; exchange offers; repurchases; stake purchases; and transactions with undisclosed values, buyers or sellers. Thomson Reuters updates its databases continuously. We use the data available at press time.