2nd April 2012
Merger and acquisition activity has had a difficult twelve months. As recently as last week, the Financial Times was still predicting a dismal year for investment banks as companies put off dealmaking. "With companies spooked by the uncertainty triggered by the eurozone debt crisis, five successive quarters of falling M&A volumes have depressed fees. Global M&A volumes dropped to $393.2bn, down 14.6 per cent on the fourth quarter of 2011, according to Mergermarket. The collapse in fees has set up expectations among some senior executives of a shake-up in the industry, with leading banks grabbing greater market share."
The weakness was confirmed by the Ernst & Young M&A Tracker showed that globally, deal values were down 13 per cent from the last quarter of 2011.
A recent survey from Thompson/Reuters suggested that companies were more likely to borrow to secure better long-term financing arrangements rather than to do deals. It said: "The outlook for merger and acquisition financings remains muted. Strategics and private equity buyers may be sitting on cash, but are reluctant to pull the trigger on new M&A transactions. A few factors are at play: the buyer/seller mismatch given a rapid rise in valuations, an election year and global macroeconomic uncertainty."
So how can the latest round of merger and acquisition activity be explained? The Ernst & Young report found a small upswing in average deal volumes, prompting Dave Murray, transaction advisory services markets leader at Ernst & Young, to say: "(This) could indicate an increase in confidence among buyers-who while still cautious about undertaking transactions, are more willing to push through larger deals."
In the Financial Times article, Wilhelm Schulz, head of Emea M&A at Citigroup, said: "There is always a time-lag with M&A from when leading indicators become positive. All things being equal there will be a recovery in deal activity. It is already materialising in the intensity of strategic dialogue with corporates and solid pipeline growth. A bright spot for banks has been a revival in debt sales, which in the first quarter overtook M&A as a driver of fees for the first time since early 2009, highlighting improving funding conditions for companies."
These recent deals certainly do not indicate a free-for-all. ValueAct, for example, decided not to make a bid for Misys, despite holding a stake of 21.5%., suggesting buyers continue to be selective in the way they approach merger and acquisition, but it appears that some larger companies are willing to open their wallets for the right company.
On the boards, few see a significant shift for the M&A industry, believing that it is, by its nature cyclical: raj pipla on the FT says: "On the Serengeti, the lions have an abundance of kills for six months and then a long dry season that culls the good from the great. Nitin Sharma on the same site suggests that the industry will have to reinvent itself: "Distressed debt is the place to be – we are going to see a lot of that. PE firms and hedge funds, who do their due diligence, will be rewarded immensely."
On their own, these recent deals do not necessarily suggest that the market is turning. However, bigger companies with cash are starting, tentatively, to reinvest. It may be a sign that companies are finally starting to spend again, but it will be some time before a clear trend emerges.
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