Yahoo Finance Here's how IPOs and M&A deals roar back: Morning Brief
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It's not a secret that M&A and IPOs have come to a relative standstill. The Federal Reserve has brought an end to easy money, and deals and exits have been have been increasingly hard to come by.
Still, with a new Fed hike likely to be announced today, investors – especially those hoping to see dealmaking – shouldn't panic. Instead, it's time to think long-term, said Phil Drury, Citi Global Head of Technology and Communications Banking, Capital Markets and Advisory.
"Look, [interest rates are] relatively short-term and M&A and equity capital markets are long-term strategic decisions," said Drury, speaking to Yahoo Finance at the 2023 Milken Conference.
In Drury's view, a little 25-basis-point hike shouldn't be a dealbreaker for long-term thinking. The real question deal-making stakeholders are looking at is: "Are things stable?"
"The more we feel that we're on top of inflation and that we're at peak rates, or even if we going to forecast rates coming down in a way that's healthy – that gives the level of stability that we need to start seeing equity issuance and more M&A take place," Drury added.
After the stability requirement is there, the next phase in M&A's renaissance is momentum. It's like a flywheel and is in part psychological – when deals start getting done, more dealmakers look around and feel comfortable making their own deals. Deals are transformative, and transformation is hard in times of uncertainty.
"I think we need to see some deals get done and then there'll be the confidence to see more," Drury said.
Another factor at play is the inertia buyers, sellers, and investors are feeling about valuations — holdovers from the former low-interest rate environment. For both deals and IPOs, all the participants need to start feeling comfortable with new valuations at the same time.
So, when does deadlock finally loosen up? The old adage that 'time heals all wounds' applies here.
"The longer the time, and the longer the duration, that impasse starts to dissolve until you start to form a bridge between the investors and the sellers, and I think we're starting to get there," said Drury, adding that a reduction in volatility will go a long way here.
For example, time will force potential sellers to get more realistic and understand that the 2018 moon-shot valuations probably aren't going to happen anymore.
However, there's a possible caveat – a recession, which both Drury and Citi CEO Jane Fraser think is a real but manageable inevitability.
"Our house view, is that we think things will enter a mild recession," said Drury. "Fairly shallow and we hope that we come through that in 2024."
For now, Drury's firm is mostly working in private placements, but sees more companies going public in 2024 — likely after whatever recession might come our way.
"We think that will lead to M&A activity once confidence and conviction is restored to the market," he said.
Allie Garfinkle is a Senior Tech Reporter at Yahoo Finance. Follow her on Twitter at @agarfinks and on LinkedIn.
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