June 28, 2022, 7:57 a.m. EDT

M&A drivers tap the brakes on private deals as economy flashes yellow

By Steve Gelsi

While financial market turmoil in 2022 has created more opportunities to find interesting deals, M&A practitioners remain more cautious to hit the accelerator on acquisitions, a senior executive at an advisory firm told MarketWatch.

“People will be disciplined on price,” said James McVeigh, founder and CEO of Cyndx Networks LLC. “Investments that would have been nice to have will not get done. They’re just not going to do it and take on additional risk for non-essential assets.”

McVeigh’s view on the M&A market comes from both operating units of Cyndx Networks: CDX Advisers, a registered broker dealer in the telecom, media and technology business as well as Cyndx, an artificial intelligence company that provides proprietary data to private companies and private equity firms to help them find target companies and price them.

Some recent data on private market deal-making backs up his observation.

Private equity and venture capital deal volume fell to its lowest monthly totals in at least a year in May, with just under $53 billion in deals, which is down 30% from the year-ago period, according to S&P Global Market Intelligence.

For the first five months of 2022, total value of deals fell about 7% to $401.53 billion, S&P said.

The deal volume for May 2022 marked the lowest quarter since the second quarter of 2020, when the onset of the COVID-19 pandemic impacted financial markets. Transaction volume in May 2020 fell to $30.4 billion, compared to $53 billion in May 2022. By comparison, dealmakers booked nearly $76 billion in deals in May 2021.

With the Fed hiking interest rates and high inflation on the scene for the first time in decades, credit has been tightening, particularly for large public companies, but these businesses may still want to invest in technological capabilities.

Also Read: Fed’s Bullard says rapid rise in interest rates now is the best way to avoid recession later

Meanwhile, a large universe of private equity firms hold tens of billions of dry powder for deals, McVeigh said. When markets get dislocated, they act. For private, venture- and private-equity backed companies, going public remains a much more difficult option, in the face of steep public equity losses in 2022, as the Nasdsaq (NASDAQ:COMP) has fallen 26.1% and the S&P 500 (S&P:SPX) has weakened by nearly 18%.

“Volatility makes it harder for investors to price things,” McVeigh said. “When they’re stable, it’s quite easy. We’re in one of those periods where the market needs to find out where the level is.”

McVeigh said he expects companies will try to hold back on layoffs and muscle through the coming economic downturn because it remains difficult to find good workers.

“Companies will eat the margin for the next six months with the expectation that they’ll come out stronger if they can keep their staffs intact during a potential downturn — that’s something you’re likely to see,” he said.

CDX Advisers and Cyndx continue to see healthy M&A and overall business activity in the middle market, particularly in data centers as they expand services they offer at an exponential rate. 

“It’s not so easy for companies to hire talent to put in sophisticated software and routers and servers into these data centers,'” McVeigh said. “There are service providers who actually do the installation and the hosting system integration. That’s something that will go on for the next ten years at least.”

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