Business Excellence Awards
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By Matthew Monks, Matthew Campbell and Jodi Xu
NEW YORK - A healthy stock market and cheap debt have traditionally been two ingredients that helped fueled booms in mergers and acquisitions. The recipe isn’t quite working this year.
Instead, the ingredients may paradoxically be prolonging a lull in transactions, say investment bankers and lawyers, many of whom had predicted a dealmaking comeback in 2013. Higher stock prices, coupled with a shaky recovery, have made some executives wary of overpaying for acquisitions, or selling too cheaply. And some potential targets have tapped cheap credit to win a lifeline and stay independent.
“If I go through my checklist of what needs to be in place to enable M&A to happen, I can put a tick in many of the key boxes,” said Mark Warham, head of mergers and acquisitions for Europe, the Middle East and Africa at Barclays Plc. “Yet so far we haven’t seen a real intensity of deals this year.”
While transactions worldwide reached about $490 billion in the second quarter, up 3 percent from the previous three months, they were down about 10 percent compared with the same period in 2012, according to data compiled by Bloomberg.
Dealmaking in the quarter was dominated by a handful of large transactions, such as SoftBank Corp.’s sweetened offer to take control of U.S. telecommunications provider Sprint Nextel Corp., which has a market value of $21 billion. In Europe Vodafone Group Plc agreed to pay about $13.5 billion for German cable provider Kabel Deutschland Holding AG.
The volume of transactions is “being supported by fewer, larger deals, rather than a steady flow of smaller transactions, and I expect that will continue,” said Hernan Cristerna, co- head of global M&A at JPMorgan Chase & Co. in London.
In North America, the $208 billion of announced second- quarter takeovers was down 3 percent from the same period a year ago, while dealmaking fell 7.8 percent in Europe to $127 billion and 9.8 percent in Asia to $120 billion, data compiled by Bloomberg show.
Investment banking fees have followed, falling 20 percent in the quarter to $4.5 billion from a year ago, according to Freeman & Co., a New York-based consulting company.
Bankers were optimistic for deals at the start of the year, buoyed by 2012’s 13 percent increase in the Standard & Poor’s 500 Index. Rising stock markets have traditionally been followed by upticks in takeovers as CEOs grow more confident about growth prospects, said Jeff Raich, a co-founder of advisory firm Moelis & Co.
“The equity markets and the deal environment usually correlate more closely than they are right now,” Raich said.
As the S&P 500 doubled during the bull market of October 2002 to October 2007, global M&A almost quadrupled to $4.3 trillion in the final year of the rally from $1.1 trillion in the first, according to data compiled by Bloomberg on completed transactions.
Deals have failed to keep pace during the current advance, which has propelled the S&P 500 to a 137 percent gain since March 2009. Takeovers totaled about $1.8 trillion in the first year of this bull market and have risen to $2.2 trillion during the past year, only a 23 percent increase, data compiled by Bloomberg show.
Some companies have calculated there’s no reason to sell while the market rises, said Barclays’ Warham.
“Shareholders seem to be standing by boards, saying, ‘Don’t sell too cheap,’” he said.
Last month, Borealis Infrastructure Management Inc. abandoned a 5.3 billion pound ($8.1 billion) bid for Severn Trent Plc after the U.K. water utility said the price didn’t reflect its true value. Severn Trent’s stock is rallying for a fourth straight year even after plunging 20 percent from 2013’s peak in May.
“The sustained run-up in stock market prices has made it more challenging in many situations for cash buyers like private-equity firms to put together deals that make financial sense,” said Lee Meyerson, head of the M&A group at law firm Simpson Thacher & Bartlett LLP.
At the same time, the buoyant market also pushed some private-equity firms to take their portfolio companies public to get a better valuation than in a sale, said John Eydenberg, co- head of America’s investment banking and head of financial sponsors for Deutsche Bank AG.
Blackstone Group LP took SeaWorld Entertainment Inc. public in April after rejecting takeover bids for the theme-park operator, said a person familiar with the matter. The buyout firm expects the $702 million offering to yield better returns over time than a sale, the person said.