M&A Slowdown May Persist After Dealmaking Fizzles in First Half

M&A Slowdown May Persist After Dealmaking Fizzles in First Half


June 30 (Bloomberg) -- A recovery in mergers and acquisitions may fail to emerge in 2010 after dealmaking fizzled in the first half, with the biggest takeover collapsing and stock markets erasing gains for the year.

The second quarter was marked by the unraveling of London- based Prudential Plc’s $35.5 billion agreement in March to buy American International Group Inc.’s AIA unit. That contributed to a 2 percent decline in global takeovers to $872.9 billion from $891.7 billion in the first half of 2009, data compiled by Bloomberg show. The drop followed a 5 percent increase in transactions in the first quarter of this year.

“The momentum has currently stalled as volatility in the capital markets is making for a challenging deal environment,” said Jeff Kaplan, global head of M&A at Bank of America Corp. “Strategic buyers will likely remain cautious until there’s greater stability in the equity and credit markets.”

Stocks around the world posted the biggest losses in the second quarter since the bull market began last year, prompting many companies to hoard burgeoning cash piles and making June the worst month for deals since July 2009. The Standard & Poor’s 500 Index and the MSCI World Index of shares in 24 developed nations sank 11 percent and 13 percent, respectively, in the second quarter. The VIX, the Chicago Board Options Exchange Volatility Index, almost doubled in the second quarter to 34.07 yesterday from 17.47 on April 1. The index, which measures the cost of using options as insurance against declines in the S&P 500, peaked on May 20 at 45.79.

‘More Challenging’

“It is more challenging to undertake meaningful M&A when your crystal ball is so cloudy,” said Brett Olsher, Deutsche Bank AG’s global co-head of M&A. “It is not all bad news however. We just haven’t seen the sustained upturn that some were predicting at the start of this year.”

Robert Kindler, Morgan Stanley’s global head of M&A, said deal levels will be unchanged from last year, when volume fell about 37 percent to $1.75 trillion.

“In volatile equity markets, stock for stock deals are more likely,” Kindler said.

Morgan Stanley advised Denver-based Qwest Communications International Inc. in a $10.5 billion stock takeover by CenturyTel Inc. in April, the second-biggest deal of the year. It advised Continental Airlines Inc. on a $3 billion stock-swap merger with UAL Corp.’s United Airlines in May.

‘Transformational’

New York-based Morgan Stanley ranks third among financial advisers with $145.3 billion of deals so far this year, according to Bloomberg data. New York-based Goldman Sachs Group Inc. tops the list with $168.8 billion of transactions, followed by Zurich-based Credit Suisse Group AG.

The 7.8 billion-pound ($11.6 billion) offer by Rupert Murdoch’s News Corp. in June to buy the 61 percent stake it doesn’t already own in British Sky Broadcasting Plc is the type of transaction bankers expect to see this year.

“Moves like News Corp.’s on BSkyB are more likely, while transformational deals, with which companies invest far from their core business, are less likely until the cycle peaks again,” said Andy Lipsky, head of M&A for the Americas at Credit Suisse.

Europe’s debt crisis and global market volatility decreased the attractiveness of riskier asset classes in the first half, making it more expensive for companies to finance new deals. The extra yield investors demand to own junk-rated debt instead of Treasuries was 7.06 percentage points yesterday, up from a low this year of 5.42 percentage points April 26, according to Bank of America Merrill Lynch data.

Smaller Deals

“Big leveraged buyouts are more difficult to contemplate in this environment,” said Bank of America’s Kaplan, who instead says conditions are ripe for smaller deals.

Charlotte, North Carolina-based Bank of America was among banks financing the $15 billion proposed leveraged buyout of Fidelity National Information Services Inc. by Blackstone Group LP, Thomas H. Lee Partners LP and TPG Capital. The deal fell apart in May after Fidelity National sought a higher price, underscoring a fragile recovery for LBO firms, which announced a record $1.6 trillion of deals from 2005 to 2007 before credit markets froze. Still, private-equity firms sit on unused funds after they raised $538 billion in 2006 and $587 billion in 2007, just before the recession, according to the Private Equity Council in Washington.

“Although interest rates have come up, credit markets are still very strong and we will see a continuation of small-medium sized LBOs,” Kindler said.

Cross-Border Deals

Dealmakers see M&A activity spread across industries for the rest of 2010, with pockets of strength in technology, financial services and natural resources, where the planned sale of at least $10 billion of assets by BP Plc will boost deal volume.

“Once the spill has been contained, there is likely to be consolidation in the energy sector,” said Kaplan, referring to BP’s plan to sell assets to help pay for cleanup and legal costs from the Gulf of Mexico oil spill.

Declines in the euro and the British pound against the dollar since the beginning of the year provide a strong backdrop for M&A in Europe, dealmakers say.

Glenn Schiffman, head of Americas investment banking for Nomura Holdings Inc., Japan’s largest brokerage, predicts an increase in cross-border deals. “Many Asian companies are cash- rich and in some cases are now more willing to look overseas for acquisitions to build their international businesses,” said Schiffman.

Amassing Cash

The average cash position of the 418 non-financial companies in the S&P 500 increased by 20 percent in the first quarter, according to Bloomberg data. European companies such as Nestle SA are also amassing cash and may seek acquisitions to spur growth. Europe’s largest company by market value will receive $28.1 billion from Novartis AG for its majority stake in Alcon Inc., enough to buy any of Nestle’s rivals in food and non-alcoholic beverages save the six biggest. That includes adding a 22 percent average premium that the Swiss company paid to acquire listed companies since 2000.

“The gun is loaded, and it has been loaded for a long time, and while boards have been reluctant to pull the trigger, that is starting to ease,” said Wilhelm Schulz, head of European M&A at Citigroup Inc. “The trend now is all about Europe being seen as a target and Asia being seen as a place for growth and expansion but at an acceptable political risk.”

source: bloomberg.com