A healthy stock market and cheap debt have traditionally been two ingredients that helped fuel booms in mergers and acquisitions (M&A). The recipe isn’t quite working this year.
Instead, the ingredients may be prolonging a lull in transactions, say investment bankers and lawyers, many of whom had predicted a dealmaking comeback in 2013. Higher stock prices, coupled with a shaky recovery, have made some executives wary of overpaying for acquisitions, or selling too cheaply. And some potential targets have tapped cheap credit to win a lifeline and stay independent.
“If I go through my checklist of what needs to be in place to enable M&A to happen, I can put a tick in many of the key boxes,” said Mark Warham, the head of M&A for Europe, the Middle East and Africa at Barclays. “Yet so far we haven’t seen a real intensity of deals this year.”
While transactions worldwide reached about $490 billion (R4.8 trillion) in the second quarter, up 3 percent from the previous three months, they were down about 10 percent from the same period in 2012, according to Bloomberg data.
The quarter was dominated by a handful of large transactions, such as SoftBank’s sweetened offer to take control of US telecommunications provider Sprint Nextel. In Europe, Vodafone Group agreed to pay about $13.5bn for German cable provider Kabel Deutschland Holding.
The volume of transactions was “supported by fewer, larger deals, rather than a steady flow of smaller transactions”, said Hernan Cristerna, the co-head of global M&A at JPMorgan Chase in London.
In North America, the $208bn of announced second-quarter takeovers was down 3 percent from the same period a year ago, while dealmaking fell 7.8 percent in Europe to $127bn and 9.8 percent in Asia to $120bn. Investment banking fees followed, falling 20 percent in the quarter to $4.5bn from a year ago, said New York consultancy Freeman & Company.
Bankers were optimistic at the start of the year, buoyed by last year’s 13 percent increase in the Standard & Poor’s 500 index. Rising stock markets had traditionally been followed by upticks in takeovers as chief executives grew more confident about growth prospects, said Jeff Raich, a co-founder of advisory firm Moelis & Co.
Equity markets
“The equity markets and the deal environment usually correlate more closely than they are right now,” Raich said.
Deals have failed to keep pace with the advance in equities, which has propelled the S&P 500 to a 137 percent gain since March 2009. Takeovers totalled about $1.8 trillion in the first year of the bull market and have risen 23 percent to $2.2 trillion in the past year, Bloomberg data show.
“The sustained run-up in stock market prices has made it more challenging in many situations for cash buyers like private equity firms to put together deals that make financial sense,” said Lee Meyerson, at law firm Simpson Thacher & Bartlett.
At the same time, the buoyant market had pushed some private equity firms to take their portfolio companies public to get a better valuation than in a sale, said John Eydenberg, the co-head of Americas investment banking and head of financial sponsors for Deutsche Bank.
Blackstone Group took SeaWorld Entertainment public in April after rejecting takeover bids for the theme park operator, said a source, expecting the $702 million offering to yield better returns than a sale. “The robust capital markets have created an alternative to M&A,” said Eydenberg.
With plenty of liquidity, corporations were appeasing investors in ways other than mergers, said Herald Ritch, the chief executive of Sagent Advisors.
Jumpiness in stock prices was not helping to create an environment for deals, said Jack MacDonald, co-head of Americas M&A and global head of technology M&A for Bank of America Merrill Lynch.
Volatility has increased and about $4.2 trillion has been erased from the value of global equities since Federal Reserve chairman Ben Bernanke said on May 22 that bond purchases could be scaled back.
“Significant moves in the equity markets are generally not conducive to a strong M&A market,” MacDonald said. – Bloomberg