Global announced M&A deals rise in Q4 2012, but conversion rate continues to decline
London, 20 December 2012
Global volume and value of announced M&A rose by 4% and 25% respectively, in Q4 2012, compared to the previous quarter. Despite this rise in activity levels, the conversion rate of deals progressing through to completion declined by 5% quarter-on-quarter (q-on-q), according to the Ernst & Young M&A Tracker, released today.
- Public bids show flickers of positive activity
- Conversion rates lower due to an increase in pending transactions
- Larger deals are returning to market, but time for completion rises
For the full year 2012, M&A volumes fell by 11% year-on-year with the corresponding total of announced deal value falling by 9%. 2012 figures were also slightly lower than 2010 figures, by 2% and 6% for volumes and value, respectively.
The Ernst & Young M&A Tracker, is compiled by Ernst & Young and the M&A Research Centre at Cass Business School from six different transaction data sources, which are consolidated and compared to activity levels in Q1 2010 using a proprietary weighted-average methodology. (See notes to editors)
Dave Murray, Ernst & Young’s Europe, Middle East, India and Africa Transaction Advisory Services Markets Leader comments:
“This year has seen activity levels fluctuate quarter to quarter, but concern over the Eurozone crisis and US fiscal cliff subdued deal making in 2012, despite a last minute uptick. Executives continue to take a cautious and watchful approach, until longer term resolutions are agreed to stabilize the global economy and confidence in it. Management teams are instead turning inwards, focusing more on optimizing internal operations to drive margins and put businesses in a stronger position for when confidence returns.”
Comeback of larger deals
In Q4 2012 there has been a significant increase in the average value of transactions announced in most markets. Globally, average value rose by 20% from US$302m in Q3 2012 to US$364m in Q4 2012. The average deal value of completed bids is also increasing, currently at US$231m, up by 9% from Q3 2012’s US$211m.
“The increase in average announced deal value – the second highest q-on-q increase since the start of the M&A Tracker in Q1 2010 – could well be an indicator that confidence in M&A is potentially returning, with larger deals now back in the headlines as we have all seen”, says Murray.
Conversion rates lower due to an increase in pending bids
In yet another sign of global macro-economic uncertainty continuing to dent corporate confidence, global M&A conversion rates are constantly falling. In both 2010 and 2011, the average conversion rate was 67%. In 2012, that conversion rate fell to an average of 62%.
Murray continues: “This was not driven by an increase in the level of withdrawn deals, which have remained stable from year to year, but rather the number of pending bids has increased significantly in the last year, which provides some positive news”.
In a sign of continued challenges for transaction completion, the number of deals completing in the last nine months of the year is currently at their lowest since the first quarter of 2010.. In Q4 2012, we are also seeing the longest average time to completion (including outstanding or pending bids), which increased for two consecutive quarters and is currently at its highest of 58 days.
“With deals taking longer to deliver, leading corporates are also more thoughtful about their approach, whether this involves reassessing their corporate strategy, finding new alternatives to traditional deal structures or revisiting underperforming ventures” Murray comments.
Public bids provide flicker of activity
One part of the M&A activity arena which has shown signs of recovery in the last quarter of 2012 is the interest in public bids. In Q4 2012, the volume of public bids was up by 12% q-on-q and the corresponding announced deal value rose by 27%. In terms of the annual figures, activity has been relatively stable, with deal volume in 2012 increasing by 3% year-on-year (y-on-y), although total announced deal value has decreased by 5%. It is worth noting that in Q4 2011, total announced deal value in this category was down by 33% q-on-q, which was then followed by two quarters of low levels of activity. 2012 ends on a more positive note, which could be a leading indicator of activity picking up in 2013.
Murray concludes: “Focused, strategic deals will continue to be in vogue in 2013. However, the completion of transactions will continue to pose challenges for the management to get them over the finishing line. Both the pre-bid and the post-announcement periods will continue to remain longer than the historical average with a general sense of less urgency in the M&A market. To get a deal done takes longer to agree and to avoid unpleasant surprises it requires even more skill in careful planning and execution than before.”
Notes to editors
Note 1: The underlying announced deal volume data for Q4 2012 (cut-off date. 7 December 2012) range from a minimum of 924 transactions reported by Mergermarket to a maximum of 1,327 by CapitalIQ. The underlying completed deal volume for the nine months up to and including Q4 2012 range from a minimum of 1,712 transactions reported by Mergermarket to a maximum of 3,380 by CapitalIQ.
Note 2: The underlying announced deal value data for Q4 2012(cut-off date: 7 December 2012) range from a minimum of US$301b reported by CapitalIQ to a maximum of US$484b by Dealogic. The underlying completed deal value for the nine months up to and including Q4 2012 range from a minimum of US$530b reported by BvD-Zephyr to a maximum of $649bn by Dealogic.
About the Ernst & Young M&A Tracker
The Ernst & Young M&A Tracker was compiled for Ernst & Young by MARC, the M&A Research Centre at Cass Business School from six different transaction data sources. Quarterly M&A activity levels recorded in Bloomberg, CapitalIQ, Dealogic, Mergermarket, Thomson and Zephyr are consolidated and compared to activity levels in Q1 2010 using a proprietary weighted-average methodology.
Based on announced deals (including completed, pending and withdrawn bids), the Ernst & Young M&A Tracker weights each database according to the total value of deals in their datasets from the start of the M&A Tracker in Q1 2010. This results in a broad picture of transaction activity. Transaction activity levels are rebased (indexed) to 100 at the base period - Q1 2010, hence a figure of 115 shows a 15% increase compared to base period, and a figure of 85 shows a 15% decrease compared to the base period.
The M&A Tracker includes “withdrawn” bids to avoid biases in volumes from quarter to quarter. As the analysis tracks announced volume, and several bids’ outcome are yet unknown, we do not exclude either the pending or the withdrawn bids, but treat each bid with an “unknown outcome”.
The Ernst & Young M&A Tracker only considers “change-of-control” deals and excludes privatizations, self-tenders, share buybacks, spin-offs, split-offs and recapitalizations. Transaction deal value has been set to a minimum of US$10m. Deal activity is measured from the date of announcement and rumored deals are excluded. Transactions are credited in the country and sector of the target only.
The report also measures the level of completed deals which were announced and subsequently completed in the nine months up to and including each quarter, also indexed to 100 in Q1 2010. From this dataset, the conversion rates give the breakdown of the status of announced deals in the nine months up to and including each quarter, at the end of each quarter.
The average time to completion is measured both as the average time to completion for deals which completed in the nine months up to and including each quarter and as the average time to completion for deals which have completed and are still pending (the time to completion is from announcement to the end of the quarter) in the same period.
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