M&As worldwide at four-year low

Saturday June 29, 2013

M&As worldwide at four-year low

NEW YORK: Mergers and acquisitions (M&A) around the world slowed to their most sluggish pace since 2009 in the first half of 2013, Thomson Reuters data show, as recession-hit European companies put the brakes on transactions and their healthier US counterparts took a cautious approach amid market uncertainty.

Some US companies took advantage of cheap financing and abundant cash to strike big deals early this year. More chief executive officers have recently taken a pause, though, partly because of worries that they might find themselves overpaying for assets if interest rates rise, which would likely pull stock markets lower.Dealmakers said that activity may slow down further in coming months. Outside the United States, confidence has yet to return in austerity-hit Europe, and many Asia-Pacific economies such as China have been slowing after years of blistering growth.

“Many people believe that the stock market has run up in a way that’s unnatural, supported by the lack of yield in the fixed income market and government-supported low interest rates,” said Paul Parker, head of global corporate finance and M&A at Barclays. “If you believe that there’s going to be a stock market correction, you’d need to be cautious about agreeing to a transaction in cash or largely in cash.”

Global deal volume fell 9% to US$978.8bil in the first six months of the year, down from US$1.07 trillion a year earlier. This was the weakest performance since the first half of 2009, when volumes totalled US$900.8bil, according to Thomson Reuters data as of June 25.

In Europe, volume fell 43% to a 16-year low of US$221bil, just 22.6% of global dealmaking, the data show. Asia-Pacific volume declined 3% to US$173.5bil.

The US market fared better. A handful of large deals, such as H. J. Heinz Co‘s US$23.2bil buyout and Comcast Corp‘s US$16.7bil purchase ofGeneral Electric Co‘s stake in NBC Universal, helped send volume up 34% to US$437.4bil, nearly 45% of global activity.

“Big, well-capitalised companies with strategic imperatives want to deploy their cash, want to take advantage of historically low interest rates, and during the first half of the year have put their money to work,” Parker said. “It is still a tough environment for smaller companies.”

Investment bankers said dealmaking would likely pick up in the fourth quarter as companies accept the inevitable transition from historically low interest rates.

US equity markets have fallen in recent weeks, and volatility has spiked, after Federal Reserve chairman Ben Bernanke said the central bank would begin to slow the pace of its bond-buying stimulus later this year.

The bond buying programme had helped push interest rates to all-time lows, which in turn created cheap financing for M&A transactions.

Dealmakers said that while cheap debt and cash-rich corporate balance sheets had increased interest in dealmaking, one major hurdle had been disagreements between buyers and sellers over how much companies were worth.

“The gap between buyers and sellers is wider than I’ve ever seen,” saidMichael Carr, head of Americas M&A at Goldman Sachs.

“CEOs worry more than ever about how their deals and transactions are going to be perceived by existing shareholders, new shareholders and regulators,” he added. “Shareholder reaction is one factor governing CEO confidence.” – Reuters

Paul Stefanick, co-head of global investment banking coverage and advisory at Deutsche Bank , said companies might find it hard to agree on stock-for-stock deals because of market volatility, although there might be opportunities for cash transactions.

“Potential sellers have really not been too eager to sell, based on their optimistic view of the upside in the equity markets,” Stefanick said. “What has happened over the course of the past week may cause some sellers to think twice about that.” – Reuters