Four and a Half Trillion Dollars of Deals and One Percent Fewer of Them

Global mergers and acquisitions reached $4.44 trillion in the first nine months of this year, up 27% on the $3.48 trillion announced over the same period last year and within touching distance of the $4.55 trillion record set in 2021.

The number of transactions was 32,419, down 1%. So a quarter more money changed hands across slightly fewer deals, which means the average deal got considerably bigger, and that is the whole character of this cycle.

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The concentration is extraordinary

There were 60 transactions of $10 billion or more, a record, together worth $1.54 trillion. That is 35% of all global deal value in sixty decisions. Widen the definition slightly and 380 deals of $2 billion or more account for $2.81 trillion, well over half the total.

A market structured this way is not a broad recovery in corporate confidence. It is a small number of very large companies with the balance sheets and the board conviction to act, while the long tail of mid sized transactions that usually makes up the bulk of the count has gone quiet.

The explanation most often given is uncertainty, and it is credible. Geopolitical and macroeconomic uncertainty weighs most heavily on the deals that need a financing market to cooperate and a forecast to hold. A very large strategic acquisition by a company with cash can survive a wide range of outcomes. A leveraged mid market purchase priced off a loan at a floating rate cannot.

What the financing environment does to this

Whitmore's Watchlist:
> EVR (Evercore Inc.): An independent advisory firm, paid on completed transactions rather than on lending.
> LAZ (Lazard, Inc.): Advisory with a large restructuring practice, which earns in both halves of a cycle.
> HLI (Houlihan Lokey, Inc.): Weighted toward the mid market, the part of the count that has been missing.

The rate environment explains the shape better than the headline does. The policy rate is 3.75% to 4%, the ten year Treasury is above 5.3%, and leveraged loan borrowers pay a floating rate that has moved against them repeatedly this year.

That changes who can buy. A strategic acquirer paying with its own shares or its own cash is largely indifferent. A financial buyer whose model depends on borrowing six times earnings and refinancing in three years is not, and the arithmetic that worked at 3% simply does not work at 8%.

So the deal mix tilts toward strategic buyers, and valuation discipline tightens at the smaller end while the very largest deals proceed on strategic logic that does not depend on the financing rate.

A slowdown was already visible in the third quarter, after a first half that chased records. That is the piece worth watching rather than the nine month total, because a cumulative figure keeps rising even as the run rate falls.

Why it matters to someone who will never do a deal

Mergers and acquisitions are a confidence indicator with money behind it. Boards commit to transactions when they believe their own forecasts, and they stop when they do not, which makes announced deal value a cleaner read on corporate conviction than any survey.

There are second order effects too. A record year for megadeals is a record year for advisory fees and for financing fees, which is part of why investment banking revenue has been strong at the large banks this quarter. It also tends to precede a period of integration, cost reduction and divestment, which affects employment in the acquired businesses with a lag of a year or two.

And for an index investor there is a composition effect that goes unnoticed. Sixty transactions of $10 billion or more means sixty companies leaving the listed market or being absorbed, and the shrinking number of public companies is one of the quiet reasons index concentration keeps rising.

Whitmore's Take: Record value on a falling deal count is sixty boards acting while everyone else waits. Worth reading the count rather than the total, because the count is the part that tells you about confidence below the very top.

Disclaimer
The content in this email does not constitute an offer or solicitation to buy or sell any financial instrument. All commentary is general in nature and is not directed at any individual investor.

Written by Daniel Whitmore
Millionaire Insiders