Too early to talk of a buy-out boom

If you believed everything M&A bankers said, global dealmaking should be storming ahead by now.

The rally in equity markets in September, bankers said, emboldened chief executives of strong balance sheet companies to start buying growth at historically low relative multiples. They pointed to the launch of Kraft Foods' $17bn hostile takeover of Cadbury and the merger of France Telecom and Deutsche Telekom's UK operations as evidence of a recovery.

This tiny boom of activity was enough for bankers to declare that corporate animal spirits had returned and the cycle had started to turn. Goldman Sachs went so far as to publish a research note predicting a perfect storm for M&A in 2010.

Others forecast activity would rise by as much as 35 per cent this year. But this so-called "recovery" in global dealmaking was short-lived. Europe's sovereign debt crisis quashed what little momentum chief executives had for M&A and knocked the confidence out of them.

They also saw the collapse of Prudential's $35.5bn blockbuster bid for AIG's Asian assets. The consequent mauling of the UK insurer's management team made them dive back under their desks.

Yet none of these factors seem to have quietened dealmaker rhetoric about a rebound in M&A for the second half of the year. JPMorgan and Morgan Stanley both rushed out research last week forecasting a resurgence, citing rising corporate earnings and an abundance of cash on company balance sheets as the main driver of more activity.

Recent history suggests otherwise. It took a good four years for M&A to hit its stride after the collapse of the technology, media and telecommunications boom.

Much of that rebound in activity was led by private equity groups. By the third quarter of 2004, 57 per cent of big leveraged buy-out deals were financed on high leverage multiples of five times or more. Given today's cost of financing, no one is expecting to see a buy-out boom any time soon. That suggests bankers will have to wait until 2011/12 for their hopes of a rebound to materialise.

lina.saigol@ft.com