Deal volumes may not bounce back until 2024, says Goldman Sachs’ joint global M&A boss Mark Sorrell

Dislocated financing markets and a volatile economic climate will weigh on global deal activity until 2024, but Goldman Sachs says M&A failure rates are in line with long-term averages.

Goldman Sachs’ joint global M&A chief Mark Sorrell: ‘We need buyers and sellers to have good visibility.’ Picture: NCA NewsWire / David Swift

Dislocated financing markets and a volatile economic climate are likely to weigh on global merger and acquisition activity until 2024, but despite the slump in deals this year failure rates are in line with long-term averages.

That’s the view of Goldman Sachs’ joint global M&A chief Mark Sorrell, who highlighted that rising geopolitical tensions and aggressive rate hikes in many markets had pushed out economic and deal recovery expectations.

“A few months ago sentiment was more for a recovery in the second half of 2023. I think now sentiment is more ‘2023 will be a tough year and the macroeconomic environment will be better in 2024’,” he said in an interview.

Analysis by S&P Global came to a similar conclusion on prospects for 2023 in a report late last month. “Overall M&A activity plummeted in 2022, and a sharp turnaround is not on the near-term horizon,” S&P said.

“The No.1 thing we’re watching is when the financing market really reopens, but in order for that to happen it’s clearly linked to the macroeconomic environment,” Mr Sorrell said. He noted while many corporate investment-grade transactions were still getting announced and completed amid challenging financing markets, it was a lot more difficult for non-investment-grade and private equity-led deals.

Those that have navigated financing markets or used shares to help fund 2022 deals include Pfizer completing its $US11.6bn ($17.3bn) acquisition of Biohaven Pharmaceuticals and auctioneering firm Ritchie Bros this month announcing a $US7.3bn purchase of IAA, including net debt.

But at the other end of the spectrum, Mr Sorrell said “there is some activity but it’s very selective and requires creative financing”.

In Australia, the deal-making scene has been dominated in the past week by Brookfield and EIG’s $18.4bn tilt for Origin Energy and fund manager Perpetual rejecting a sweetened $33-a-share offer by Regal Partners and BPEA EQT. Still, announced Australian M&A activity has tumbled more than 60 per cent so far in 2022, compared to record levels of deals this time last year, according to Refinitiv.

That drop has outpaced a global slump in announced 2022 transactions. Mr Sorrell said despite the global downturn, 2022 had proven to be a reasonable year after frenetic activity in 2021.

“You would expect a higher failure rate but actually, and we track this quite closely, the failure rate of deals that have signed is pretty much in line with long-term history,” he added.

“Deals are taking slightly longer to close on average.”

Mr Sorrell said Goldman’s data put the average deal’s completion at about 5.25 months, with time frames lengthening due to more rigorous regulatory timetables and complicated demergers.

Some company boards and cashed-up private equity firms would require more clarity about where the rate tightening cycle would land and how economies would fare before pulling the trigger on transactions, he added.

“When there’s more certainty I think valuations adjust and that’s what we need for M&A to really come back. We need buyers and sellers to have good visibility.”

Mr Sorrell expects the Australian market to be among those in the Asia-Pacific that bounce back faster. “(Australia) should be one of the markets where activity comes back relatively quickly,” Mr Sorrell said, noting strong levels of liquidity and the transparent regulatory framework.

So far in 2022, the average earnings multiple bidders are paying globally for acquisitions has not dropped as sharply as the 20 per cent decline seen during the Global Financial Crisis, according to Goldman’s analysis.

Mr Sorrell said while multiples this time might not recover as quickly as they did in the wake of the GFC, liquidity pumped into financial markets during the pandemic would assist a bounce-back.

He also noted a strong rally in the US dollar and the relative valuation of its sharemarket could embolden further outbound M&A by US acquirers.

“It’s a combination of valuation and currency,” Mr Sorrell said.

His optimism about an eventual M&A recovery is linked to liquidity in the system and the increased role private capital – spanning private equity, family offices and sovereign wealth funds – is now playing in deals.

“(M&A) is much more diversified than it was 20 years ago,” Mr Sorrell said, noting while corporates accounted for 90 per cent of deals two decades ago, that figure was now closer to 60 per cent.

M&A linked to environmental, social and governance factors has also been increasing. Goldman estimates ESG-driven M&A this year amounts to $US200bn or between 5 and 10 per cent of total activity. Mr Sorrell said that figure could double over the medium term as decarbonisation efforts accelerated across markets.

In Refinitiv’s global adviser league tables, Goldman ranks in top spot for announced M&A so far this year. In Australia across inbound, outbound and domestic deals Goldman is second behind Barclays/Barrenjoey, while for Australia-targeted transactions the firm sits in eighth spot.

The focus in the investment banking industry is now turning to headcount reductions ahead of bonus season early next year.

The slump in M&A activity compared to a record 2021 has reignited expectations of job cuts across the sector. Citi and Barclays started axing staff last week while Bloomberg reported Goldman in September began its biggest round of cuts since the start of pandemic.