Wall Street's mergers, acquisitions continue, but it's no big deal
NEW YORK--More companies are getting together these days, but it's no big deal.
Corporate mergers and acquisitions were up for the first six months of this year in the United States, but only if you measure a certain way: The number of deals announced grew to nearly 5,900 through June, up from about 5,100 in the first half of 2011, according to research firm Dealogic.
Measure by what really counts, the dollars, and all that activity looks far less impressive: The average deal announced in the first half was valued at US$68 million, down from US$102 million a year ago.
“I wish I had better news,” says Amanda Levin, who tracks mergers and acquisitions at Mergermarket, a research firm. “It's all doom and gloom.”
Blame the economy and uncertainty.
Businesses don't know how long the debt crisis in Europe will last, who will win the presidential election, what will happen to corporate tax rates and where gasoline prices will go next.
Financing is cheap for potential buyers, with interest rates at historic lows, but businesses may not see a rush to secure financing because the Federal Reserve plans to keep rates low for at least two more years.
The M&A slowdown isn't for lack of cash: Companies are sitting on near-record piles of it, socking it away ever since the Great Recession. The Federal Reserve calculates that nonfinancial companies have stored US$1.7 trillion in cash and other liquid assets, up 17 percent from three years ago.
Businesses seem content to hold on to their money.
“People don't like to make big decisions, the consequences of which they will have to live with for a very long time, when there is so much uncertainty,” says Anil Shivdasani, a professor in the business school at the University of North Carolina. “And in those situations, doing nothing is often seen as the safer route.”
It's not just the United States. Mergers and acquisitions around the world are down 16 percent by volume in the first six months of this year compared to the same period in 2011, according to Dealogic. It measures M&A volume by adding up the prices that buyers expect to pay in announced deals. In the U.S., mergers and acquisitions are off 23 percent and had their slowest first half since 2003.
There have been signs of life lately: In just the past two weeks, Anheuser-Busch InBev agreed to buy the half of Corona maker Grupo Modelo it doesn't already own for US$20.1 billion in cash. Campbell Soup said it planned to buy healthy-foods purveyor Bolthouse Farms for US$1.55 billion. And health insurer WellPoint said it would buy Medicaid specialist Amerigroup for US$4.46 billion.
Still, what Mergermarket calls “megadeals,” deals worth more than US$10 billion, are down 20 percent across the globe so far this year. Megadeals made up 12 percent of announced deals in the first half. Three years ago, they made up 30 percent.
Even private-equity firms, whose express purpose is to buy companies, are taking a break. And it's not that would-be buyers don't have cash to spend — they do. They just don't have any confidence in what's to come.
Mergers, when two companies combine, and acquisitions, when one company buys another, are inherently risky: Will the two sides play nice? Does either company have hidden losses or other dark secrets? Will the combo be too big to manage?
The riskiness of deals is exactly what makes them an important window on the economy. More M&A signals that companies are hopeful about the future and confident in their own strength. If the latest M&A data is any indication, companies are neither particularly hopeful nor particularly confident.
Dealogic estimates that private-equity firms have sold off more than they've bought in M&A deals so far this year. That's happened in only two other six-month periods since the firm started keeping records in 1995.
And forget about Europe: As a result of the European financial crisis, deals targeting Spanish companies plunged 82 percent by volume in the first half of this year, to their lowest six-month total since 1997. Deals targeting French companies skidded 67 percent.
Even emerging markets, where many companies have turned for growth in recent years as the U.S. and Europe cooled, are losing their shine. M&A volume fell in Brazil, Russia and India, overshadowing an increase in China.
“People have come to realize how difficult it is to integrate companies” from emerging-market countries, says Tom Sauermilch, partner and co-head of the M&A practice at law firm McDermott Will & Emery. “Lots of management time is devoted to them, you have to be very patient — culture, travel, and compliance” are the big challenges.
Still, there are a few pockets where business is brisk.
Stephen Guy, managing director at KPMG Corporate Finance, says two groups of U.S. companies are driving what M&A business there is. The first consists of owners of smaller private companies who want to sell before higher capital-gains taxes kick in Jan. 1 that would make it less lucrative to sell in the future. The second involves large companies that want to prune units that are less profitable or no longer fit their strategy.
But Guy also said that sellers have lower expectations for what they can get, even compared to just 18 months ago.
“They're pretty pessimistic about the next 12 months,” Guy says, “so they're thinking, 'Better take what I can get.'”
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