Deutsche Bank-Thematic Research MA when rates fall-110722723

0Deutsche Bank Research | M&A spotlight: M&A when rates fall | October 2024Deutsche BankResearchM&A when rates fallOctober 2024Luke TemplemanResearch AnalystLuke.Templeman@db.com+44 207 541 0130Galina PozdnyakovaResearch AnalystGalina.Pozdnyakova@db.com+44 207 547 4994IMPORTANT RESEARCH DISCLOSURES AND ANALYST CERTIFICATIONS LOCATED IN APPENDIX 1. UNTIL 19th MARCH 2021 INCOMPLETE DISCLOSURE INFORMATION MAY HAVE BEEN DISPLAYED, PLEASE SEE APPENDIX 1 FOR FURTHER DETAILS.Distributed on: 10/10/2024 09:33:16 GMT7T2se3r0Ot6kwoPa1Deutsche Bank Research | M&A spotlight: M&A when rates fall | October 2024Executive summaryExecutive summary and macro backdropWhat happens when rate cuts start?Corp. M&A may recover quicker this cycleCorp. capital allocation in an election yearDealmaking trendsMarkets245631Rate cut cycles have a strong impact on M&A marketsIn the US, rate cutting cycles tend to coincide with private equity managers slowing their dealmaking.However, in Europe, private equity managers appear to care little about the level of rates. This is likely due to the bank-dominated debt environment.Corporate M&A in the US tends to slow as interest rates fall but European corporates are less-fazed by a drop in rates.We believe M&A will recover quickly in the current rate cutting cycleWe do not expect a recession or material economic slowdown (of the type that tends to accompany rate cutting cycles).Corporates are benefiting from having deleveraged through the market downturn in 2022. Credit spreads remain tight offering potential to borrow.Corporates hoarded cash during covid, 2022 and 2023 waiting for the recession that never came. The benefit of holding cash falls with rate cuts. Private capital is sitting on ~$4.5tn of dry powder.There are a growing number of stressed M&A targets.Dealmaking tends to rise with equity markets – something we expect to continue in the absence of a recession. Equities may soften into the US election before recovering into year end.Resilient economyUndemanding leverageCashpilesTargets aplentyStrong stockmarkets2Deutsche Bank Research | M&A spotlight: M&A when rates fall | October 2024The macro backdropExecutive summary and macro backdropWhat happens when rate cuts start?Corp. M&A may recover quicker this cycleCorp. capital allocation in an election yearDealmaking trendsMarkets245631WorldUSEuro areaGDP growth3.2% in 2024and 20252.6% in 2024~2.1% in 20252.2% in 20260.9% in 20241.5% in 2025Recent data suggests our forecasts may be too optimistic by 0.25-0.50ppInflationInflation may have peaked, but upside risks remain as price pressures persist. Disinflation trend is in place. Should approach the Fed’s target in 2025.Energy, wage, and services price pressures are easing but risk of future inflationary shocks due to climate change and geopolitics.Central banks50bps cut in Q4 2024, 100 bps cut during Q1-Q3 2025.Terminal rate of 3.25-3.50% by end-Q3 2025.ECB: 25bps cut each in Oct and Dec 2024, 75bps in H1 2025Termi