Wall Street’s latest deal boom began to falter in 2022. The industry is bracing for the slowdown to drag on into the second half of the year.
Stimulus by governments and central bankers in response to the pandemic led to a rapid recovery from a recession and exuberant capital markets. That recovery, along with changes in the way customers and businesses operate, sent executives shopping for deals. A large number of startups went public.
The result was a bonanza for Wall Street. Goldman Sachs and Morgan Stanley posted record profits. They struggled to hire enough workers and paid billions of dollars in additional compensation. Global M&A volumes approached $6 trillion last year, including a record $1.56 trillion in the third quarter, according to Dealogic data.
Goldman CEO David Solomon warned in February that last year’s results were not sustainable. He was right. Dealmaking has slowed, and bankers don’t expect activity to pick up anytime soon.
Investment banking revenue fell 36% at Goldman Sachs and 37% at Morgan Stanley in the first quarter, and analysts expect similar declines for the full year. Citigroup executive Andrew Morton said last month that the bank expected a 50% to 55% drop in second-quarter investment banking revenue.
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Analysts have become more pessimistic. In January, Wall Street forecasts called for about $21 billion in combined investment banking revenue this year from Goldman Sachs and Morgan Stanley, according to FactSet. Those forecasts now call for about $17 billion in combined revenue.
Global M&A volumes topped $1 billion in the first half of the year, which is still high by historical standards. Some big deals are still in the works. Merck is in talks to acquire biotech Seagen, while Elon Musk continues his bid to buy Twitter.
In the meantime, the subscription of shares has remained dormant. The total value of U.S. initial public offerings was less than $4 billion in the second quarter, down 97% from the all-time high in the first quarter of 2021. IPOs won’t resume in earnest until business leaders have a better view of the outlook for inflation and the economy. growth
Rising interest rates and falling markets have hurt the deal finance market, clouding the outlook. Walgreens Boots Alliance last week abandoned plans to sell its Boots and No7 Beauty businesses, saying the bids were too low in part because potential buyers could not raise enough financing.
Kohl’s cited the weak financing market when it suspended deal talks with Franchise Group.
Clarity has been elusive. US inflation continues to rise more than expected, reaching levels not seen in decades. The Federal Reserve raised rates by 0.75 percentage points last month, the biggest increase since 1994, and signaled that more hikes are likely this summer. Fed Chairman Jerome Powell said on June 29 that he was more concerned about high inflation than the possibility that higher rates could tip the economy into a recession.
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The S&P 500 fell 21% in the first half of 2022, while government bond yields and commodity prices soared, marking the worst start to the year for markets in decades. The consumer confidence index, a measure of Americans’ views on the economy’s near-term outlook, fell in June to its lowest point in nearly a decade.
CEO confidence is key to a strong bidding market, and that confidence has wavered, Evercore ISI analyst Glenn Schorr said. Weak and volatile capital markets are another obstacle to doing business, he said.
“Sellers want yesterday’s price and buyers want today’s price,” Schorr said. “It takes time to get both on the same page.”
Write to Charley Grant at charles.grant@wsj.com
This article was published by Dow Jones Newswires, a service of the Dow Jones Group
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