Merger arbitrage traders don’t expect deals to pick up until next year, though they are seeing signs of diminishing antitrust fears, while software companies are becoming attractive targets.
(Bloomberg) — Merger arbitrage traders don’t expect deals to pick up until next year, though they are seeing signs of diminishing antitrust fears, while software companies are becoming attractive targets.
Two-thirds of the 12 merger-arbitrage and event-driven desks, analysts, brokers and fund managers polled by Bloomberg News from Sept. 25 to Oct. 3 said a rebound in US merger and acquisition transactions will likely take place in 2024.
This quarter, they are following a much smaller count of potential takeover targets compared with the same period last year, underscoring a subdued dealmaking environment amid high interest rates and tight financing market.
United States Steel Corp. is a top takeover target in the fourth quarter, according to seven respondents. Their other top picks include software firm Alteryx Inc. and football club Manchester United Plc, a popular name in previous polls.
US Steel has been in the M&A spotlight since announcing a strategic review process after attracting a long list of suitors. The Pittsburgh-based company’s shares have climbed about 44% since August, when it rejected rival Cleveland-Cliffs Inc.’s buyout offer. The takeover battle is playing out with Stelco Holdings Inc. and others circling, while the United Steelworkers union is also weighing in.
While M&A activity in recent months has picked up from the doldrums earlier this year, they still lagged 2022 and 2021 levels. Year-to-date deal value was $891 billion at the end of the third quarter, down 28% from the same period last year, according to data compiled by Bloomberg.
“The third quarter was another weak quarter for dealmaking in the US, as the threat of further rate rises persisted and we saw the usual summer slowdown in the months of July and August,” said Phil Isom, global head of M&A at KPMG. “However, we did see an uptick in deals announced in September, and with the end of rate rises hopefully in sight we are seeing some green shoots in the M&A market.”
Read more: Dealmakers Find It Slow Going in $1 Trillion Game of Catch-Up
The regulatory environment for deals appears to be improving, and that should give companies more confidence in pursuing transactions, survey respondents said. In the third quarter, some of the largest pending deals — including Microsoft Corp’s acquisition of Activision Blizzard Inc. and Amgen Inc’s takeover of Horizon Therapeutics Plc — have overcome major antitrust hurdles after initial pushback.
While overall US deal activity is down from a year ago, the area of application and systems softwares is a bright spot for deals. Alteryx is considered one of the companies with “the highest likelihood of consolidation,” Citi analysts including Tyler Radke wrote in a note to clients.
The renewed optimism comes on the heels of Cisco Systems Inc.’s $28 billion takeover of Splunk Inc., the fifth largest software deal in history. It also signals a return to a busier M&A environment.
Other large-cap buyers, such as IBM and Salesforce Inc., could be more on the offensive as top-line growth rates slow, as many accumulated large cash piles because of improved margins and higher interest rates, Radke wrote. In addition, the software industry has become a hunting ground for private equity firms looking to put cash to work.
“We are seeing for the good assets, assets that are in demand, valuations are still quite high and they don’t have the same price sensitivity that we’re seeing in other sectors,” Isom said.
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