What a change a few months makes. Everyone comes back from the summer holidays and the M&A market is once again alive and making front-page news. Looks as if some people didn’t take their holidays this year:
- US: Disney spends $4bn to purchase Marvel Entertainment, home to the Incredible Hulk and Spiderman, their biggest purchase since Pixar Animation in 2006 for $7.4 billion. eBay sells 65% of Skype for just over $2 billion to an investor group, and this was even a deal where the cash portion was 96% of the consideration with the venture capital industry putting up the money for the purchase.
- Trans-Atlantic: Kraft makes a bid for Cadbury. Hershey hires J.P. Morgan to consider a ‘white knight’ counter bid for Cadbury.
- Europe: The mobile phone market in the UK sees Orange and T Mobile proposing a merger , and no one even suggests that this could have competition concerns when their combined market share would be over 30%!
What’s happened? For anyone following the market closely, actually the market has never been dead. Yes, there were many deals withdrawn (but we recently looked at this, and although there were high profile deals that may have been pulled, only 2% of deals actually were!). Other deals were delayed (and it’s difficult to tell how many were postponed, but anecdotal evidence would indicate quite a few: but at least postponement isn’t cancellation!).
Advisors were working on deals, and the pipeline is large with many CEOs waiting for the time to pounce. These are often acquisitions that had been designed in their strategy departments (or in their own heads) over the past 18 months, but are only seeing the light of day now.
The demand for deals just doesn’t disappear anymore. 2008 saw a dearth of new deals but the first half of 2009 may ultimately be consider the low point: in 2009 in the US, the M&A market was 42% lower than the already depressed 2008. This period still had levels of deals (both in terms of numbers and value) that were way above the market lows earlier in this decade and many times greater than the peaks only 20 years ago. Fundamentally, companies need to do corporate combinations at all levels in order to compete in today’s global economy.
Even in a recession this need doesn’t disappear. Many companies and some industries need to restructure. And one company’s acquisition is another company’s sale of a division – as the seller needs to raise money for the core divisions, or, as in the case of eBay above, a refocus on the core).
Of course, the M&A market is highly reflective of the general economy, and for particular companies and industries, the general conditions for that industry. There is a ‘halo effect’ from the overall economy, because the confidence to do a major acquisition declines as overall confidence levels decline with company sales and the malaise in the world in general (as reflected in the news everyone hears on the television, in the press and when talking to friends, neighbours, customers and suppliers). This means, of course, that the M&A market will recover – as we’re seeing – as the economy recovers. Our analysis at Cass Business School shows a lag of a quarter or two in this increase, so it is to be expected that we’re seeing more than just ‘green shoots’. In the M&A market, ‘green shoots’ are the advisors’ strong pipelines, but they can ‘harvest’ the deals when they start happening with a pace we’ve only recently seen again.
Debt financing will also reappear, as will be the subject of a future blog entry.
We hear about ‘green shoots’ in the financial press all the time these days. I believe that the M&A market now beyond that phase? In fact, do you ever really have ‘green shoots’ at all in M&A (except for the advisors), or does the M&A market spring to life quickly like weeds, where it seems as if the dandelions come up within a day or two after you’ve mown the lawn?