Global dealmaking activity has plodded along at its slowest pace this year since 2005 but a recent burst of corporate buying strength has convinced some bankers that the merger market might have bottomed out.
Six of the year’s seven big deals so far – valued at more than $20bn each – were proposed during the second quarter, including InBev’s unsolicited bid for Anheuser-Busch and France Telecom’s offer for TeliaSonera.
After a “terrible” start to the year, the past few months have been strong, said Jean Manas, Deutsche Bank Americas M&A head, who added that the company’s pipeline of unannounced multibillion-dollar deals is the thickest it has been since last summer.
“Corporates are engaging in activity; it feels like the market has somehow bottomed out,” Mr Manas said.
“That’s very encouraging, in that it suggests the decline in M&A is not going to be as dramatic as it was when the tech[nology] bubble burst.”
Brewer InBev has cobbled together a group of 10 banks to finance its cash bid to control Anheuser but the debt market’s capacity in general remains limited.
Without an improvement in the credit markets, dealmakers might hit the ceiling on financing as they work to staple big mergers together.
While there could be several more deals in the $40bn to $50bn range this year if they are paid for with stock, it is less clear that banks can finance another handful of all-cash deals of that size, said Kenneth Jacobs, head of Lazard’s North America financial advisory business.
“There could certainly be a few more of these deals but I’m not sure how deep the market is on the debt side,” Mr Jacobs said.
Goldman Sachs and JPMorgan, two banks whose balance sheets have held up better through the credit crisis than their rivals’, ranked at the top of the merger advisory list for the first half of the year.
Jimmy Elliott, global M&A head for JPMorgan, said the reputational boost the bank has received for weathering the credit crisis to date has spilled over into its M&A advisory business and other operations.
“By definition, people want to be with people who are winners, who have survived and who can be counted on,” he said.
Faring less well, however, is the private equity industry – at least in the market for large-sized deals.
Activity by buy-out funds in emerging markets is hitting record volumes, and the market for mid-sized deals, which require only modest debt financing, is still chugging along.
The $4.1bn buy-out of Bristol Myers’ ConvaTec business, however, ranked as the largest private equity deal announced in the first half of this year – a far cry from the $39bn buy-out of Equity Office Properties, which Blackstone won after a bidding war that ended in the comparable period last year.
Private equity bidders are working to find creative new ways to finance their purchases with enough debt to hit their targeted rates of return. But instances in which they have been successful, so far, have been few and far between.
A significant recovery in large-scale private equity investment might not be on the cards for a while, most bankers agree.
Corporate acquirers, accordingly, might become more aggressive, not just by making takeover bids in the first place but by wedding themselves to those bids with enough fervour to provoke more unsolicited or hostile deals.
There is a gap between the prices companies feel they should command and the values buyers are willing to pay, bankers said, which is not uncommon in a declining or rough market.
But the discrepancy has not stopped suitors such as Microsoft and NRG Energy from stalking potential targets and bankers expected that trend to continue.
Merger advisers are also closely watching China, India and other emerging markets to see whether they are likely to act as an engine to drive the global economy through the US downturn or whether they, in turn, will soften.
“I just don’t see how, against the backdrop of what’s happening in the US with housing prices and consumer confidence, the emerging markets will sustain themselves,” said Mr Manas.
“I suspect they will all experience some slowdown.”