Rising rates and rising stocks may wake up a sleepy deals market: Morning Brief

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Wednesday, August 3, 2022

Today’s newsletter is by Brian Cheung, an anchor and reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

Dealmaking is in a slump this year, but signs of a possible market bottom could be pushing some companies to go shopping while prices are cheap.

The catalyst: a stock market that has rebounded roughly 10% from its lows in June, building optimism among investors that the worst of 2022 could be over.

And, of course, continued interest rate hikes from the Federal Reserve.

Large deals have been a key feature in the headlines over the last several weeks: Amazon’s (AMZN) play for One Medical (ONEM) and JetBlue’s (JBLU) fight to acquire Spirit Airlines (SAVE) serving as just two examples.

A Spirit Airlines plane prepares to take off from Oakland International Airport on July 28, 2022 in Oakland, California. (Photo by Justin Sullivan/Getty Images)

A handful of deals have emerged even as of this week.

Toronto-Dominion Bank (TD) on Tuesday announced it would be buying investment banking company Cowen. And Estée Lauder (EL) is reportedly in talks to buy fashion house Tom Ford.

“There is a sense that prices have dipped, and that there’s some value to be had particularly if you’re in the market for something that’s an important strategic acquisition,” said Marc Kushner, the head of law firm Dorsey & Whitney’s US M&A practice .

Another factor: interest rates.

As the Federal Reserve lifts borrowing costs to tame inflation, companies worry that it will only cost them more to finance transactions the longer they wait. Kushner told Yahoo Finance because the Fed’s rate hikes have happened so fast, companies have been concerned about stalling deals for even a week because of volatility in rates.

“You might or might not be at the bottom of the value market, but low interest rates are already gone and it’s only going to get worse in the short-term,” Kushner said.

Still, deal volume in the first half of this year is pacing well below the previous two years. According to data from KPMG, companies around the world inked about 24,000 deals worth a total of roughly $1.8 trillion.

This compares to more than 32,000 deals in both the first and second half of 2021, with aggregate deal values ​​exceeding $2.6 trillion over each period.

KPMG's midyear report on M&A noted that global deal activity is pacing slower than the last couple of years.  For specifically US-based companies, 6,085 deals (worth about $827 billion) were inked in the first half of the year.  (Source: KPMG, CapIQ, Refinitiv, Pitchbook)

KPMG’s midyear report on M&A noted that global deal activity is pacing slower than the last couple of years. For specifically US-based companies, 6,085 deals (worth about $827 billion) were inked in the first half of the year. (Source: KPMG, CapIQ, Refinitiv, Pitchbook)

An uncertain economic outlook clouded by inflationary pressures and a war in Ukraine have sidelined many buyers who otherwise would have been happy to deploy capital in deals.

Nevertheless, KPMG noted there is pent-up demand for dealmaking. About 80% of surveyed business leaders in the US saying their appetite for deals is “as strong or stronger” than in 2021.

Private equity firms and activist investors, for instance, are already eating thanks to cheaper prices from 2022’s stock market spill. In the first half of this year, buyout funds have announced or completed about $110 billion in deals to snatch up public companies and take them private.

At Elliott Investment Management, cheaper stock prices may have enabled the Paul Singer-led fund to take stakes in Pinterest (PINS) and PayPal (PYPL), stocks that have both suffered heavy losses since late 2021.

And if the stock market rebound continues and the vibe among investors keeps improving, dealmaking efforts to get in front of an aggressive Fed may only be accelerated.

What to Watch Today

Economic calendar

  • 7:00 a.m. ET: MBA Mortgage Applicationsweek ended July 29 (-1.8% during prior week)

  • 9:45 a.m. ET: S&P Global US Services PMIJuly final (47 expected, 47 during prior month)

  • 9:45 a.m. ET: S&P Global US Composite PMIJuly final (47.5 during prior month)

  • 10:00 a.m. ET: Factory OrdersJune (1.2% expected, 1.7% during prior month)

  • 10:00 a.m. ET: Factory Orders Excluding TransportationJune (1.7% during prior month)

  • 10:00 a.m. ET: Durable Goods OrdersJune final (1.9% expected, 1.9% during prior month)

  • 10:00 a.m. ET: Durables Excluding TransportationJune final (0.3% during prior month)

  • 10:00 a.m. ET: Nondefense Capital Goods Orders Excluding AircraftJune final (0.5% during prior month)

  • 10:00 a.m. ET: Nondefense Capital Goods Shipments Excluding AircraftJune final (0.7% during prior month)

  • 10:00 a.m. ET: ISM Services Index (53.5 expected, 55.3 during prior month)

Earnings

  • Amerisourcebergen (ABC), Allegiant Travel (ALGT), Allstate (ALL), Booking Holdings (BKNG), Biomarin Pharmaceutical (BMRN), Borgwarner (BWA), Cars.com (CARS), Civitas Resources (CIVI Clorox (CLX), CVS Health (CVS), elf Beauty (ELF), Energy Transfer (ET), Fate Therapeutics (FATE), Fastly (FSLY), Fortinet (FTNT), Cedar Fair (FUN), GoDaddy (GDDY), Genco Shipping & Trading (GNK ), Generac Holdings (GNRC), Hostess Brands (TWNK), Host Hotels & Resorts (HST), McKesson (MCK), MercadoLibre (MELI), MGM Resorts International (MGM), Moderna (MRNA), Marathon Oil (MRO), MBIA (MBI), MetLife (MET), Monster Beverage (MNST), New York Times (NYT), Novavax (NVAX), Realty Income (O), Pacific Biosciences of California (PACB), PDC Energy (PDCE), Qorvo ( QRVO), Sturm Ruger & Company (RGR), Sunrun (RUN), Stratasys (SSYS), STORE Capital (STOR), Under Armor (UAA), Western Union (WU), Yum! Brands (YUM)

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