Readers of this blog know that I do not usually try to predict the M&A market. I like to look at longer-term trends, trying to identify the drivers for the next merger wave and seeking to provide some guidance on what will make it turn upwards.
I continue to insist that M&A is a confidence market: even if valuations are reasonable, even if the acquirers have lots of excess cash and even if many M&A bankers are saying that they have healthy pipelines of deals, there is one component that must be in place for the market turn. That factor is confidence in the board rooms and executive suites of the buyers. If the chief executive cannot convince the board that NOW is the time to do the deal and that they will not be embarassed by the purchase announcement (especially if it turns out that they could have bought the target cheaper in two or three months — that is, before closing — than they are offering now), then the deals will not be done.
I think there’s still too much talk of ‘double dip’. There’s still too much uncertainty, despite the old Wall Street chestnut that ‘rising markets climb a wall of worry’.
Yet, there’s been a slew of articles written in the past several weeks that talk about ‘merger mania’ or similar sentiments that just might cause a board to seek their first mover advantage in announcing a deal. Especially if that deal has been in discussion with the target for the past several months or even years, waiting for the right time to be consumated.
Look at this article, entitled ‘Mergers and acquisitions mania disrupts bankers’ summer breaks‘ from the Guardian in the UK. As the title suggests, it talks about M&A bankers being forced to cut back their holidays this summer because of the deal volume. And that the size of announced deals was larger a couple weeks ago in mid-August than any other August week since 2006, when the M&A market was almost peaking. (But caution to the reader: one or two large deals can skew these figures, and the announcement of BHP Billiton’s $43.8 billion takeover of Canada’s Potash Corp has done just that, similar to the Pru / AIA deal earlier in the year that did the same at the time.) The Guardian also noted that M&A fees have been increasing at investment banks again, although ‘this year represent[ing] about 35% of global investment banking fees, still below a 10-year average of 38%, according to Guardian calculations based on ThomsonReuters data. The sector peaked in 2008, when M&A accounted for 48% of all investment banking fees.’
Look at this article title from Financial News which also was written about a week ago in mid-August: ‘”Planets align” for M&A recovery’. That article wrote: ‘the M&A market has been building momentum since April, with the three month moving average for weekly M&A rising 71% in the past four months. July and August, traditionally quiet months, have been the busiest summer since the late 1980s.’ It also noted the rise in cash balances at potential acquirers: ‘For the first time in three years, companies also have the means to do deals. Daniel Stillit, special situations analyst at UBS, said: “Leverage multiples [the ratio between net debt and Ebitda] are at their lowest since 2003…”‘ Perhaps most importantly in my mind, the article noted that companies have squeezed out just about all the cost savings they can in order to raise (or even just maintain) profitability, so M&A may be the next area to look for growth.
It’s not just the journalists, although they are experts at picking up short-term trends. The consultancies, although not without some bias, have written of a resurgence as well. Look at this McKinsey article, and the title of the article says it all: ‘A singular moment for merger value?‘ As I talk to private equity investors, they are beginning to be more optimistic, too.
Hmmm. Maybe the confidence is returning.