Dealmaking drop-off reveals rise in business anxiety

By Julia Horowitz, CNN Business

Dealmaking booms when markets are stable and businesses are feeling good about the economy and access to financing. When conditions deteriorate, confidence flags, and the number of companies going public or pursuing takeovers drops. That’s what is happening now.

Details, details: The number of global initial public offerings, or IPOs, has dropped by 54% so far this year compared to 2021, according to data from Dealogic provided to Before the Bell. Mergers and acquisitions have plunged by 25%.

The drop-off comes as central banks around the world hike interest rates, leading to higher borrowing costs and tighter financial conditions. Decades-high inflation is also feeding recession fears as consumers begin to deplete their pandemic-era savings, roiling markets and generating questions about how long the economic recovery can last.

In this environment, companies that had wanted to execute IPOs or sell their businesses are staying on the sidelines — preferring to wait for a market recovery when they could raise more money from investors.

See here: This week, Walgreens Boots Alliance announced that it had changed its mind on plans to sell Boots and the No7 beauty brand.

“Since launching the process, the global financial markets have suffered unexpected and dramatic change,” the company said in a statement. “As a result of market instability severely impacting financing availability, no third party has been able to make an offer that adequately reflects the high potential value of Boots and No7 Beauty Company.”

Italian oil and gas company Eni recently postponed the IPO of Plenitude, its renewables and retail business.

“The volatility and uncertainty currently affecting the markets require a further phase of monitoring,” the company said.

Activity could pick up again after the traditional summer lull. Volkswagen said Wednesday that it’s still working toward an IPO for Porsche in the fourth quarter. But that deal will largely depend on how the situation plays out from here.

At this point, investors want companies that have dominant market positions and strong cash flows, according to Willem Sels, the chief investment officer for HSBC Global Private Bank. That means younger companies going through the IPO process may look less attractive.

“What people are looking for currently are companies that are really in the quality space — the well-established companies,” Sels told me.

Feeling the pain: Big banks cashed in during last year’s record dealmaking streak when markets were still hot. Now, they’re hauling in way less from their advisory businesses. It’s one reason shares are struggling. The KBW Bank Index, which tracks US lenders, is down 22% year-to-date, compared to a near 20% decline in the S&P 500.

“All that fee income, it doesn’t come in any more,” Sels said.

Here’s who decides if the US economy is in a recession

Prominent Wall Street economists, investing luminaries like Cathie Wood and executives like JPMorgan Chase CEO Jamie Dimon can make recession predictions until they’re blue in the face.

But a US recession won’t arrive — at least not officially — until a group of eight economists says so.

Members of the Business Cycle Dating Committee, who are experts in macroeconomics and business cycle research, work under the umbrella of the National Bureau of Economic Research, a private nonprofit organization.

There’s a clear lack of racial diversity among members, my CNN Business colleague Nicole Goodkind reports. They’re all over 60 years old and associated with prestigious universities. The group includes two women.

The final determination of who gets to serve on the committee is made by one man: NBER President James Poterba, an MIT economist. The group has no predetermined meeting dates and its deliberations are private.

Why it’s important: The NBER’s recession designations are used and accepted by the US government, businesses, investors and journalists. That means they inform policy decisions and the historical analysis of past downturns.

While a recession is commonly defined by two consecutive quarters of negative GDP growth, the NBER’s guidance is more vague. According to the committee, a recession “involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

The designation often comes retroactively, which means the United States could currently be in the middle of a recession without anyone officially recognizing it until after the fact. The NBER formally announced the Covid-19 recession in June 2020 — and that was faster than usual.

On the radar: The US economy shrank at an annualized rate of 1.6% in the first quarter, according to the latest data from the Bureau of Economic Analysis.

That’s a slightly deeper contraction than the previous estimate. But economists who are predicting a recession don’t think it’s likely to arrive before late 2022 or 2023.

Bed Bath & Beyond was a Reddit favorite. Now it’s a mess

Bed Bath & Beyond was a one-time darling of meme stock traders. Now, the company is in disarray and its shares have plummeted.

CEO Mark Tritton has been ousted after only three years at the retailer’s helm. Bed Bath & Beyond has tapped Sue Gove, an independent director on the company’s board, to take the reins until it finds someone permanent for the position.

“We must deliver improved results,” Gove said in a statement.

Bed Bath & Beyond poached Tritton from Target in 2019. He was previously in charge of expanding Target’s private label brands, which he tried to replicate at Bed Bath & Beyond. But those items haven’t caught on with customers the same way they did for competitors.

On Wednesday, the chain reported significantly lower-than-expected earnings for the past quarter. The brand’s sales declined 27% from the same period a year ago.

Shares fell 24% on Wednesday and are down again in premarket trading on Thursday. They’ve shed about 66% so far this year.

Tritton’s departure was “inevitable” and the earnings report “does very little to inspire confidence in the company’s trajectory,” Neil Saunders, managing director of GlobalData, told clients.

Quick flashback: Armchair traders coordinating on Reddit helped send Bed Bath & Beyond shares to nearly $54 in early 2021. They closed Wednesday below $5 per share.

Up next

Walgreens Boots Alliance and Constellation Brands report results before US markets open. Micron follows after the close.

Also today:

• The PCE Price Index for May, the Federal Reserve’s preferred measure of inflation, arrives at 8:30 a.m. ET.
• OPEC and allies meet by videoconference. The group isn’t expected to announce that it will pump more oil.

Coming tomorrow: The latest ISM Manufacturing Index, which tracks the industrial sector of the US economy.

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