Return of the deal: with the economic background making it increasingly difficult to launch mergers, you'd have assumed that there would be little appetite for companies to do deals. Yet a number of compelling reasons, and the weight of history, may be on the side of the optimists, says Lawrie Holmes.
| Author | Holmes, Lawrie |
| Position | Economics |
By 2008, the financial crisis had become a grim reality across the globe and the spiralling volume of mergers and acquisitions, which saw a bumper $4.7trn-worth of deals the previous year, according to Dealogic, quickly fell away. Roll on four years and there is still fear, most acutely felt in the eurozone, about another potential collapse in world markets. Yet at the same time companies have hoarded vast amounts of cash--[pounds sterling]754bn in the UK according to the ITEM Club economic think tank, $1.8trn in the coffers of US corporates, according to investment bank Credit Suisse, and up to [pounds sterling]2bn across eurozone companies.
So is it likely that we could see a new surge in M&A as cash-rich companies seek to capture relatively undervalued peers? Or is the fear of another global economic crisis weighing down on management teams, especially as the eurozone teeters close to a break-up?
The headline numbers make for interesting reading. According to FT Mergermarket, global M&A volume dropped from around 16,000 deals in 2007 to around 10,000 in 2009. This recovered by about half at the end of 2011. However, the deal rate has slowed through the latter half of 2011 due to increasing uncertainty about eurozone sovereign debt and political upheaval, not to mention the situation in the Middle East. The result has been that the first quarter of 2012 is the lowest quarter in terms of deal volume globally for seven years.
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In April, Ernst & Young's global Capital Confidence Barometer Survey said: "While most of the ingredients necessary for a deal recovery are now in place--plentiful cash reserves, adequate credit availability and rising economic confidence--the M&A market continues to be restrained by conservatism. Only 31 per cent of respondents stated that they plan to pursue acquisitions in the next 12 months, compared with 41 per cent in October 2011."
Fear in the markets
Stephen Morrissette, adjunct associate professor of strategy at University of Chicago Booth School of Business, says that although corporates have excess cash and access to low-cost capital to fund acquisitions, the actions of their boards are often irrational.
He says: "Animal instinct is the primary factor determining strategy and will often reflect the optimism of acquirers that economic opportunity is increasing, which leads to perceptions of higher profits and cash flows and less risk. Abundant cash and low-cost...
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