The conditions are in place for a surge in M&A activity

20th January 2012

Overall, data suggests that merger and acquisition activity was stronger in 2011: "Global M&A up 2.5% in 2011: Global M&A in 2011 totalled $2.18 trillion, up 2.5% from the same period in 2010 ($2.13 trillion) in the busiest year since 2008 ($ 2.40 trillion)."

In particular, private equity buyouts were the strongest since 2008: "Deals were announced with a total value of $277.7 billion. That's a 15.3% increase from the same period in 2010." There was also strength in a number of individual sectors: "Dealmaking across the "Energy, Mining & Utilities" sector saw the highest total value of M&A deals in 2011, according to Mergermarkets. The group of corporations accounted for 25.6% of global M&A deals announced, with totalling $557.7 billion."

But this momentum waned in the second half of the year with each successive quarter seeing less activity than the last. $432 billion in deals were conducted in the fourth quarter, down 22.5% from Q3. The HP/Autonomy deal in October was the last high profile deal of the year.

The weakness in the second half was also seen in data from Thomson Reuters : "Global mergers and acquisitions rose 3 percent this year to $2.464 trillion from $2.396 trillion in 2010, according to preliminary data from Thomson Reuters. The increase was driven by a strong first half, which had promised that 2011 would be the start of a new multiyear M&A cycle before the euro zone crisis hit in the summer. But activity declined dramatically in the second half, with dealmaking in fourth quarter falling 31 percent from the previous three months to $398 billion."

Some believe that deal-making will pick up again in 2012. This piece highlights a recent survey by the Royal Bank of Scotland (RBS) Corporate & Institutional Banking group: "58 per cent of medium to large UK companies are actively considering acquiring a smaller business in 2012, compared to 34 per cent at the start of the year." 

It adds: "Moreover, the report indicated that the number of companies seeking to acquire a new subsidiary from abroad has doubled over the last year, with many firms looking to mergers as a means of strengthening during tough economic times."

It is a view shared by some fund managers. Richard Buxton, head of UK equities at Schroders, says: "As companies realise that we are not headed for a double-dip, capital expenditure will rise. We expect the recent pick-up in M&A to become more prevalent; currently mothballed projects to be put into action." Rory Bateman, Head of European Equities at the group, agrees: "(The low price of European shares) is something that is evidenced by the increased M&A activity. Indeed, we have recently seen a number of US companies buying European franchises to take advantage of the depressed valuations."

Whats stopping M&A in the US?

However, the ‘no' vote is still strong, particularly with regard to US M&A activity. In this piece Roger Conrad argues that President Obama will want to shore up his anti-corporate credentials through opposition to high profile deals: "The first casualty was AT&T's proposed buyout of Deutsche Telekom's (DTEGY.PK), which the former canceled due to concerted opposition from the US Dept of Justice and the Federal Communications Commission.

"The upshot is a new hurdle to utility mergers that's likely to curtail activity until after the election, with the exception of deals small enough to get under the radar."

Equally, argues this FT piece , global M&A may be hit by the continued threat of a banking crisis in the Eurozone: "Many industrialists are hanging on to cash that earns very little interest because they fear that banks may be unable to finance their working capital requirements. The likelihood of recession in the eurozone likewise damps animal spirits.

The article concludes that much money will go into share buy-backs, which are ‘relatively painless for managers since, unlike dividends, they entail no continuing commitment to pay'.

In this piece , Brad Hintz, analyst at Alliance Bernstein, argues that it must be a frustrating time to be an M&A banker: "The corporations … can't make a commitment. The corporate executives realise that if they pull the trigger on an M&A deal and the economy slips into a recession, they're going to look very, very foolish in front of their board of directors."

It is difficult to disagree with the conclusion of the Reuters piece: "Bankers said a healthy backlog of deals could emerge when macroeconomic conditions improve. Many companies have conserved cash on their balance sheets through the downturn and valuations are cheap." The conditions are in place for a surge in M&A activity, but the confidence is not. If confidence returns, M&A activity could come thick and fast. In the meantime, expect little more adventurous than buy-backs.


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