2011 ripe for uptick in deal making if confidence and clarity return
- Global deal volume up 3% and deal value up 26% in 20101
- Private Equity (PE) firms continue to rebound with global deal volume up 10% and value up over 90%2
- Evidence of a two-speed recovery, with emerging market M&A volume up 6% and value up over 46%3
LONDON, MOSCOW, 22 DECEMBER 2010 ― Against a backdrop of economic uncertainty and a slow recovery, deal activity this year increased slightly, according to Ernst & Young. Global merger-and-acquisition (M&A) deal volume is up 3% in 2010 so far, hitting US$1.9 trillion in value, up 26% on 2009, but significantly below the all-time yearly high of US$4.7 trillion recorded in 20074.
2010 began with greater optimism, as corporations and PE firms had significant cash on hand and credit became increasingly more available. However, corporations moved cautiously as the uncertain global economic picture – caused by austerity measures, increasing taxes, currency conflicts and regulatory concerns, among other issues - delayed them from entering the market in a more robust way.
Global M&A activity, which trended downward during the first half of 2010, saw a slight resurgence in the third quarter when four of the year's ten top deals5 were announced. This was followed by a slow fourth quarter as European sovereign debt concerns deepened, driving down the value of Europe-bound deals to a five year low6, putting a drag on global M&A. Overall, there has been a slight recovery led by PE and emerging market deals.
Pip McCrostie Global Vice-Chair for Ernst & Young Transaction Advisory Services, says:
"The past year was characterized by a two-speed recovery, with momentum building in emerging markets versus limited deal activity in developed markets."
Emerging markets witnessed a surge in M&A activity in 2010 with inbound and outbound BRIC (Brazil, Russia, India and China) deal value reaching almost US$372 billion, up more than 46% over 20097.
The year PE staged a comeback
Private equity rebounded this year with acquisition activity recovering from 2009 lows. To date, PE firms have announced 1,778 deals valued at US$196 billion8. Improved credit conditions have fueled an increase in deal activity, evidenced by increasing buyouts of larger transaction sizes as 2010 unfolded.
“Still the volume of PE investments in Russia is insignificant and represents only 0.02% of GDP as compared to 0.3% in the US, 0.34% in the UK and 0.13% in China.”
Exits from portfolio companies are clearly a focus, since PE firms faced limited selling opportunities in 2008 and 2009. The IPO market remains an alternative for exit, however in recent months getting to the finish line was more difficult and uncertain.
With some of PE's highest profile buyouts from 2006-07 on the 'auction block,' Ernst & Young expects to see a number of PE-backed listings in 2011. Secondary transactions represented a large portion of exits during the year, a trend we expect to continue as firms look to sell businesses held longer than the average holding period, with other PE funds hungry for deals.
From crisis to recovery
"As companies emerge from the financial crisis having cut costs significantly, a focus on growth has returned," says McCrostie. "The first step is a renewed focus on organic growth, the second step is acquisitions. All the fundamentals are there. Confidence just needs to return."
Already, unsolicited bids are picking up, totaling 8% of global M&A in 2010, the highest percentage in over 10 years9. "This is perhaps an indication of early stages of an M&A market recovery providing significant opportunities for those looking to drive growth.
In an Ernst & Young survey carried out in October, over half (58%) said credit/capital conditions were better now than six months ago, yet only 41% of companies are planning on making an acquisition over the next six to 12 months, down from 57% in April of 2010. In the longer term, M&A is on the corporate agenda with the majority of companies (54%) planning to do deals in the next one to two years.10
"Confidence has been the primary restraining factor in deal activity over the past year. Investors face uncertainty stemming from regulatory changes, austerity measures, unemployment, fears of inflation and European fiscal woes. Confidence and clarity are the missing pieces of the puzzle. Cash is burning a hole in the proverbial corporate pocket. But confidence and a lack of clarity on these issues are lagging, and economic uncertainty is holding M&A activity back."
M&A in 2011 will be less focused on the urgent need to unbridle underperforming or non-core assets, and more about strategic deals. The number of bargain-basement deals will decline as valuation multiples have improved throughout the year. Corporations find themselves on firmer footing and more focused on strategic, carefully planned and executed transactions.
"We are seeing a new level of preparedness among corporates," says McCrostie. "It's a function of sitting on the sidelines for so long, patiently watching the market, knowing where the values lie and having access to cash and credit. There is a lot of pent-up demand. Corporates have one foot on the accelerator and one foot on the brake looking for strategic fit when the time is right."
As the year comes to a close, the tailwinds are forming that will propel leading companies back into the market in 2011, realizing opportunities for game-changing strategic deals. The emerging winners will be those that drive long-term growth through innovation, globalization and an entrepreneurial mindset.
"Companies are lining up on the runway with engines revving," says McCrostie. "With record-breaking levels of cash on hand and confidence slowly returning to the markets, we expect to see deal activity continue to increase in 2011, albeit in a moderate, targeted way”.
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1 Thomson Financial as of 12/1/10, over the same period in 2009
2 Dealogic, as of 11/30/10
3 Thomson Financial as of 12/1/10, over the same period in 2009
4 Thomson Financial as of 12/1/10
5 Thomson Financial as of 12/1/10
6 Dana Cimilluca, Euro-Zone Turmoil Depresses Deal Making. Wall Street Journal. 12/1/10.
7 Thomson Financial as of 12/1/10, over the same period in 2009
8 Dealogic as of 11/30/10
9 Thomson Reuters, Mergers & Acquisitions Review: Financial Advisors, First Nine Months 2010, 10/1/10.
10 Ernst & Young Capital confidence barometer, October 2010.