Pamela Barbaglia & Anirban S

(Reuters) – The value of global merger and acquisition (M&A) activity took a 29% hit in the first quarter of 2022 as market volatility fueled by Russia’s invasion of Ukraine pushed the brakes on last year’s breakneck pace of dealmaking.

According to Dealogic data the overall deal volume fell to $1.01 trillion, from $1.43 trillion during the first quarter 2021. This was due to a 29% decrease in crossborder transactions. Large companies were forced to pause by geopolitical tensions and to postpone large strategic buyouts.

“The rising cost of energy, the dislocation of supply chains and higher inflation are key factors impacting both corporate and private equity clients today,” said Dwayne Lysaght, co-head of EMEA M&A at JPMorgan Chase & Co. (NYSE:)

Even though volume fell 28% in the first quarter, North America still accounted for over half of all deal activity. Asia Pacific activity declined 33% to $184.2 million.

Volumes in Europe fell 25% to $227.67 Billion

According to dealmakers, the first quarter’s activity was down sharply compared to record breaking volumes last year. It is difficult to duplicate.

“While execution has become a bit harder due to the increased volatility and macro concerns, that hasn’t stopped new activity,” said Stephan Feldgoise, co-head of global M&A at Goldman Sachs (NYSE:).

Microsoft (NASDAQ) acquired Activision Blizzard (“Call of Duty”) for $75 Billion. Other major transactions included Orange, MasMovil and Microsoft (NASDAQ) combining their Spanish business through a 19.6 Billion euro joint venture.

Dealmakers claimed that stock market volatility has made it more difficult for world’s biggest companies to make use of the power of their market capitalization in order to acquire smaller counterparts.

“In this moment of dislocation, the volatility has greatly affected the use of stock,” said Cary Kochman, co-head of global M&A at Citigroup (NYSE:). “This is no frenzied marketplace any more.”

However, despite all these challenges, the overall environment for buyingouts is still strong.

“We’re taking a glass half-full approach – while we’re seeing volumes down, it still has a pace that looks very similar to 2016 through 2019,” said Kevin Brunner, co-head of global M&A at Bank of America (NYSE:).

The number of transactions valued at more than $10Billion increased to 13, from 12, in the last quarter. This indicates that both companies and private equity funds did not shy away pursuing bigger deals in spite of the market turmoil.

While debt is still cheap relative to historic levels, private equity purchases accounted for $204.47 Billion of total volumes.

“You’re going to see private equity M&A continue to make up a larger portion of the M&A activity overall as the dry powder to deploy remains at record levels,” said Jim Langston, co-head of U.S. M&A at Cleary Gottlieb Steen & Hamilton LLP.

In the face of the uncertainty in the macroeconomic environment, traditional lenders shied away form taking on greater leverage risk and direct lenders responded by stepping up to assist with large leverage buyouts.

Although public-to-private deals are the most popular, this kind of deal has a much higher execution risk. Not all will succeed. Simona Maellare is the global head of UBS Alternative Capital Group. Although it’s more costly, financing companies from the private markets remains available.

SUMP HEALTHCARE

The technology sector continues to lead, despite lower overall volumes than last year.

Dealmaking in real estate saw a significant jump, rising 47% as more people returned to work from home, making it more attractive to potential buyers.

The usual share of healthcare deals fell more than half as large pharma firms adopted a cautious strategy in response to volatility on the markets caused by geopolitical tensions.

While many blue-chip firms rushed out of Russia to get their money, they resisted the temptation to use large cash reserves for buyouts. Activist investors increased pressure on boards to sell or dissolve companies to increase investor value at a time where public market valuations were lower.

Pier Luigi Colizzi said that “companies from many industries feel their business models must change significantly in the future because of the technology impact but also for a number of other reasons.” Barclays (LON:)’ head of investment banking for continental Europe and co-head of EMEA M&A.

The dealmakers indicated that they will continue to be careful when considering large-scale transformational transactions and will have to account for their company’s exposure to commodity and gas prices.

Although deal activity is expected to increase once geopolitical tensions can be resolved, they expect deals to remain smaller.

Citi’s Kochman said, “This moment is where I foresee that there won’t be an epidemic of transactions exceeding $75 billion.”

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