DEALWATCH: Boomtime Remains Elusive For M&A

28th Jun 2010 13:19

By Jessica Hodgson Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Although economic fundamentals suggest M&A activity--moribund in the first half--could pick up in the second, caution in mature markets remains the order of the day and a return to boom-time could still be months or years off, bankers say. Merger-and-acquisition activity has already gotten off to one false start this year. In January, amid strong equity markets, stabilizing corporate earnings and recovery in some of the world's developed markets, all the stars seemed to be aligned for a strong pick-up. In fact, based on statistics released this week from Dealogic, the total value of global M&A for the second quarter, at $552.7 billion, is the second-lowest quarterly value for five years. The only worse-performing period was the third quarter of 2009, during the depths of the financial crisis. Deal activity actually deteriorated in the second quarter of 2010, Dealogic says: Although deal values in the first half of 2010 were 3% higher than a year earlier, the pace isn't picking up. M&A growth continues to be largely driven by emerging markets, particularly the Indian subcontinent and Latin America, both of which saw deal values growing by comfortably over 150%, while deal values in mature markets either shrank, as in North America, or grew very marginally, as in Europe. Few bankers see deal activity coming back with a vengeance in the second half in mature markets. "The regulatory environment remains uncertain, and concerns around sovereign debt will be with us for some time to come. It will be at least a couple of years before we see the next peak in the M&A cycle," Henrik Aslaksen, co-head of international M&A for Deutsche Bank, said at a recent briefing on the subject. On paper, there should be reasons to feel more positive on companies' desires to make big strategic bets, as Morgan Stanley equity strategists pointed out in a recent research note. Corporate balance sheets are generally strong, earnings continue to recover and valuations are relatively attractive, with a 12-month forward-looking average price-to-earnings ratio of 10 times, according to Morgan Stanley. "In the last few weeks, we have started to see a pick-up in M&A activity, even though capital markets remain fragile," Morgan Stanley equity strategist Graham Secker said in the note. "The scope for this to continue is significant." Yet caution continues to crimp this nascent optimism. Market volatility, particularly in Europe where the threat of sovereign debt defaults and a banking sector shakeout looms over the markets, is still pronounced. Both debt and equity capital markets activity remains muted on these sentiments, meaning that the cost of financing mega deals can be off-putting. "A significant pick-up in M&A is unlikely until we see a thaw in capital markets," Morgan Stanley says in its note. One factor that is weighing on dealmakers, particularly in Europe, is the heightened possibility of investor backlash against "transformational" deals. Concerns lingering after the financial crisis have recently been amplified by the Prudential PLC (PRU.LN) debacle. The 160-year-old British insurance firm's recent $35.5 billion attempt to buy the Asian arm of American International Group Inc.'s (AIG) insurance business was shot down by investors, many of whom felt Prudential was overpaying for the asset and were unhappy that they were being asked to stump up in a giant equity-raising exercise. Several M&A practitioners have said recently that boards remain nervous of transformational or challenging deals. "Financing for acquisitions isn't a key concern: There's a lot of liquidity available in the market for the right deal. The concern is uncertainty in the hearts and minds of boards," Hernan Cristerna, head of M&A, EMEA, for JP Morgan, said. There is optimism that the fundamentals set the scene for a broader recovery in deal-making once some of the issues dogging European confidence abate, M&A practitioners say. Liam Beere, co-head of M&A for UBS, said he expects a pick-up in the fourth quarter. And JP Morgan's Cristerna points to the fact that more bigger deals are getting done than a year ago. Based on Dealogic figures, the overall number of European deals with a value of over $1 billion rose to 67 in the first half, compared with 55 in the year-earlier period. Nevertheless, those hoping for an immediate up-tick in confidence are likely to be disappointed: Most bankers see the caution continuing for some time to come. -By Jessica Hodgson; Dow Jones Newswires; +44207 8429373; [email protected]. (END) Dow Jones Newswires June 28, 2010 08:19 ET (12:19 GMT)