Trends in M&A

There are many ways to assess market conditions. You could look at general stock indexes such as the S&P 500 or Nasdaq, follow specific company stocks, or just consider overall macroeconomic conditions. For investment banks and other firms in the financial services industry, however, one of the most important figures is deal volume. Merger activity is closely watched in order to ascertain the value of future investment banking revenue.

Unfortunately, the merger market does not usually fare well in times of economic downturn. Although you may think that more bargains may be available when companies hit a rough patch, it is equally difficult for another company to raise the necessary cash and take the risk of buying a business if the conditions look bleak. Currently, several large deals, such Kinder Morgan’s recent acquisition of El Paso Corporation Corporation (http://dealbook.nytimes.com/2011/10/16/kinder-morgan-to-buy-el-paso/), are buoying the merger market. The volume of global mergers and acquisitions even increased to $2.748 trillion, which is a 22% increase from the same last twelve months ending in August. However, this increase was not due to fundamental reasons that lead to a hospital environment for merger activity. Rather, it was fueled by an increase in hostile offers as well as solid company balance sheets.

A better indication for the future of M&A activity would be to look at economic health and growth, which is slow at the very best. Firstly, both in the U.S. and abroad, there is little or no growth in the economy and sovereign debt crises in Europe have only worsened. Second, and perhaps more important, is the general decline in the stock market. As mentioned earlier, merger activity and the stock market are closely related and it is unlikely that deal volume will pick up without a similar rise in the market. And lastly, a more qualitative force affecting M&A is the legal hurdle present in the form of antitrust enforcement. The Obama administration has propelled an increase in antitrust efforts and requests further information more frequently than before. Furthermore, it has also contested several deals in the past year. For example, legal forces deterred Nasdaq from acquiring NYSE Euronext and also thwarted Avis’s bid for Dollar Thrifty. The administration is also currently in the process of suing AT&T for its attempt to acquire T-Mobile.

However, in the midst of various economic indicators that lend to a general decline in M&A, there are a few markers that may work against these forces. These are, as mentioned earlier, the probability of finding a bargain when valuations are low and available cash on balance sheets. Therefore, although the ability and logic to make a deal does exist, companies remain fearful of slow economic growth and legal uncertainty. For the time being, it seems as though investment banks will have to work extra hard in convincing their clients to pursue merger activity. Read more about the ups and downs of M&A at: http://dealbook.nytimes.com/2011/10/18/as-economy-goes-so-go-takeovers-even-as-bargains-abound/

By Meha Patel