Is M&A making a cautious recovery?
After several recent large deals in the USA, and with deal-making up across a number of regions globally, advisers are cautiously pointing to more to come. Alongside a slightly improved macroeconomic outlook, this month's $39 billion deal between AT&T and T-Mobile USA is expected to give others more confidence to look at corporate growth by acquisition or merger. Many advisers are of the view that M&A is now recovering from the bottom of the cycle and that the recovery is at last visible across most sectors and geographic regions.
Laurence Whitehead, Corporate Finance Principal at MacIntyre Hudson, comments: "There has been a steady but cautious increase in confidence in the corporate sector. External factors could well make the recovery a bumpy one but it's likely that there will be more large deals this year compared to 2010. A higher volume of larger deals tends to lead to the same in the SME marketplace which is good news for all. The problem is that there were a number of false starts to the recovery last year and this, together with continuing market turbulence worldwide, lingers in the memory of both advisers and their corporate clients."
Laurence continues: "We are all aware that macroeconomic upheaval and external shocks can trigger volatility - this prompts decision makers at all levels to put takeover and merger plans on hold. In recent months we have seen the ash cloud, a sovereign debt crisis in Europe, a Japanese earthquake and tsunami and now unrest in a number of Middle Eastern countries. None of these factors help to build short term confidence."
Global fundraising
However, despite these considerations, global fundraising reached $189 billion in the first quarter of 2011, which is down on the final quarter of 2010, but 12% higher than the comparable quarter one year ago. While the market turbulence led to several issuers delaying initial public offerings, others appear to be pressing ahead. An increasing amount of the capital raising has been for M&A and growth financing. Consequently, debt markets appear to be recovering and even covenant-lite loans are being talked about again.
However, private equity has worryingly still not returned to anywhere near its pre-crisis glory days. Although the volume of buyout deals rose according to Mergermarket almost 67% in the first quarter of 2011, its share of total activity fell back to less than 10%. Larger deals are still proving difficult to complete because of the need for multiple equity partners which increases complexity.
Cash and shares
Strategic buyers are often choosing to use more shares in deals despite having high levels of cash on their balance sheets. This is a further sign of continued macroeconomic caution and a desire to preserve larger liquidity buffers than in the past. Cash-only deals made up only about half of all activity in the first quarter of 2011, which is down from 63% in the fourth quarter of 2010 and the lowest quarterly level since 2001.
Laurence adds: "We are hopeful that our clients will deal effectively with other pressing challenges at the operational level, such as rising fuel and commodity prices. These could yet eat into earnings growth over the coming months, which may again lead to increased caution amongst corporate buyers. However, the deals we are currently seeing are all about strong companies realigning and refocusing their businesses, using their cashflows and healthy balance sheets to grow by acquisition. We expect this to continue into the foreseeable future as the strong get stronger and the rest get somewhat left behind."
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