Dive Brief:

• Mergers and acquisitions in the U.S. and Canada plummeted to $267 billion during the second quarter, a 39% decline compared with the same period last year, according to S&P Global Market Intelligence.
• High inflation and forecasts of recession discouraged dealmaking, S&P Global said. The most aggressive monetary tightening in four decades and “higher financing costs also caused investors to remain risk-averse,” S&P Global said.
• Dealmaking in the energy sector was a bright spot both in the U.S. and worldwide, S&P Global said, noting the $18.8 billion purchase of Magellan Midstream Partners by ONEOK and Chevron’s $7.7 billion purchase of PDC Energy.

Dive Insight:

Amid the M&A drought, market volatility has enabled some companies in real estate and other sectors to snap up firms badly in need of capital, top executives said during Q2 earnings calls with analysts.

“Volatile markets often present the best opportunities to acquire high-quality real estate at exceptional values,” Brookfield Asset Management CEO James Bruce Flatt said during the company’s quarterly earnings call on Aug. 9.

“Today, we are in an environment with higher interest rates, higher inflation and tightening lender requirements, all of which create uncertainty and pockets of stress in real estate markets globally, particularly though in the U.S.,” he said.

“This bodes well for experienced managers with strong access to capital like us — the strong will get stronger and, as always, the weak will go away,” Flatt said.

Prosperity Bancshares CEO David Zalman also sees an appealing M&A landscape.

“We believe that higher technology and staffing costs, funding costs, loan competition, succession planning concerns and increased regulatory burden all point to continued consolidation,” Zalman said during the bank’s July 26 quarterly earnings call.

“We remain ready to move forward in the event a transaction materializes and will be beneficial to our company's long-term future and will increase shareholder value,” he said. Prosperity Bancshares completed a merger with First Bancshares of Texas on May 1.

Barings BDC, which primarily focuses on debt investment in middle-market companies, has held back from the market so far in 2023 compared with previous years, according to CEO Ian Fowler.

“It's been rather anemic in terms of volume this year and I think the reason for that is M&A activity has just been soft as private equity firms are taking a pause to see in this rising rate environment what happens to multiples, enterprise values,” Fowler said during the company’s Aug. 10 quarterly earnings call.

“Is it really the time to back up the truck and just kind of do anything that comes to market right now? Our decision was not to do that,” he said, while noting that the U.S. may avoid recession.

“As we're getting through to the end of this rising rate cycle — and with only a modest decline in purchase prices — I think we're going to see a thaw in the second half of the year,” Fowler said.

i3 Verticals, a provider of electronic payments software, is also taking a restrained approach to M&A, according to CEO Gregory Daily.

“We’re being conservative on valuations, because I think we have a lot to choose from,” Daily said during the company’s Aug. 9 earnings call. “It seems like we used to do half of the deals we look at. Now we do less than 10% — we’re pickier.”

Cherry picking can be especially rewarding during periods of market turmoil, Flatt said.

“The greatest and easiest way to make money in either buying businesses or real estate is to buy great businesses with bad capital structures,” he said. “I think we're going to see that, both on the private equity side and in real estate, over the next 18 months.”