European M&A activity dropped by 40% year over year, as the market shows signs of leveling out after a record-breaking stretch.
Deals reached $214.7 billion in Europe in the first quarter of 2022, down from $356.6 billion same time last year, according to Bloomberg data. That’s still nearly 14% higher than in the first quarter of 2020, just before mergers and acquisitions skyrocketed.
The decline outpaces a more than 16% dip in global M&A activity, which fell to $1 trillion in the first three months of the year.
Big Law firms and European dealmakers are trying to navigate an increasingly complex regulatory regime across the globe, coupled with rising interest rates and inflation concerns, all while keeping a close eye on the impact of Russia’s stalled invasion of Ukraine.
“People don’t like and businesses, as a general rule, don’t like uncertainty and, in particular, geopolitical uncertainty,” Thierry Bosly, co-head of White & Case’s private equity practice, said in an interview.
“If you take a more global view, maybe you can treat this as more as the normalization of activity,” Bosly said.
Simpson Thacher, Latham Top Tables
Simpson Thacher & Bartlett led other Big Law firms in deals announced by principal in Europe over the first three months of the year, working on 17 deals worth $32.8 billion. The firm also topped the global M&A league tables in the first quarter, advising on 54 deals worth $137.6 billion as principal.
The Wall Street firm led Blackstone Inc. on its $23.81 billion recapitalization of Mileway, the largest operator of urban warehouses in Europe. Simpson Thacher also worked with Sports Ventures Acquisition on its $1.7 billion combination with Dneg PLC.
Latham & Watkins came in second, working on 67 deals as principal worth $24.6 billion. The firm advised Australian financial conglomerate Macquarie on its controlling stake of the National Grid’s UK gas distribution network for $12.7 billion.
Kirkland & Ellis, Clifford Chance and White & Case rounded out the top five European deals advisers.
M&A activity in Europe has largely tracked global markets over the last two years, breaking records and keeping lawyers busy. Much of that activity has continued to a large extent this year as well, despite the decline in the first quarter, said Kem Ihenacho, global vice chair of Latham & Watkins’ private equity and investment funds practice.
“It’s been a continuation of a robust M&A pipeline across a number of different geographies across Europe,” Ihenacho said.
Latham & Watkins topped the league tables by deal count for the first quarter, followed by CMS Legal Services, White & Case, Kirkland & Ellis and Baker McKenzie.
Dealmakers are trying to navigate a shifting regulatory environment and other hurdles in Europe, similar to the challenges they face in the U.S.
The Bank of England increased interest rates in December and the U.S. Federal Reserve raised its benchmark federal funds rate from .25 to .5 in mid-March. Those rates are expected to increase several times this year to counter inflation, White & Case’s Bosly said.
“Rising interest rates, inflation, supply chain disruptions, labor challenges, and an increasing regulatory scrutiny of production could have a moderating past impact on transactional markets in 2022,” Bosly said.
Private equity investors are now updating their investment criteria with more emphasis on energy supply sustainability, Bosly said, noting that there will be an increase of importance of ESG in the assessment of M&A transactions in the future.
The M&A market remains relatively robust at the moment, but geopolitical headwinds stemming from the war in Ukraine could have had an impact on levels of activity overall, Ihenacho said.
The Russian invasion of Ukraine has disrupted certain supply chains, including for semiconductor chips already in short supply, according to Bosly.
Ukraine producesmore than half of the world’s supply of neon, a key ingredient in making semiconductor chips, but suppliers halted production operations in March after Russia’s invasion of the country began. Russia also exports 40% of the world’s supply of palladium, another key piece of chip making.
“There’s obviously a significant degree of geopolitical uncertainty and it’s too early to predict how that’s going to play out,” Ihenacho said.