Dealmakers Are Willing, But Economy Looks Weak
M&A thought leaders offer their views on what the next 12 months will bring
December 16, 2011
Many of the stars are aligned for a booming M&A market in 2012, dealmakers say. But the big question mark remains the economy. On the buy side, corporations boast more cash than ever before. Many of them are in dire need of catching up because they neglected research and development during the lean years of the recession. Buying may prove better than building. Also on the buy side, private equity firms need to spend all the record-breaking capital they've raised-or they'll have to give it back. On the sell side, demand is high, thanks to a wealth of venture capital-backed startups and PE-backed companies that have matured after years of nurturing from their backers.
"All the building blocks for transactions are in place," says Sullivan & Cromwell LLP partner Frank Aquila, one of more than a dozen M&A thought leaders interviewed by Mergers & Acquisitions for this story.
Thwarting the underlying fundamentals for the last several months has been the macro economy, especially the volatile stock market, which has wreaked havoc on M&A momentum.
Deal negotiations that began well enough in the spring fell apart a few short months later when stock prices changed dramatically-sometimes in different directions for buyers and sellers. "The result is a bunch of deals are on hold," laments Mark Brady, head of M&A at investment bank William Blair & Co.
Deal volume in the U. S. will end 2011 flat, although deal value will close up 18 percent at a total of $894 billion, estimates Ernst & Young LLP's transaction advisory services.
2012 has a good chance of doing better. "With improving valuations, available capital and easing credit markets, we are starting to see M&A and market volatility subsist simultaneously," says Steve Krouskos, Ernst & Young's global and Americas markets leader for transaction advisory services. "With an infusion of confidence in 2012, we can expect to see more deals in the pipeline," he says. "While geo-political and macro-economic uncertainties have restrained deal activity, there is desire in the board room for dealmaking."
Confidence will make a come-back, predicts Bob Profusek, chair of the global M&A practice of law firm Jones Day. "It's going to stay unsettled and be choppy for awhile," he says. "But eventually we'll all get tired of the European story, and some day animal instincts will return. Eventually we'll get optimistic. We always do."
Frank Aquila, Partner, Sullivan & Cromwell LLP
Aquila serves as legal adviser to a wide range of companies, including Amgen, Anheuser-Busch InBev and British Airways. One notable middle-market deal he worked on in 2011 was Diageo's taking a 50 percent interest in Zacapa Rum. The deal was small but significant because it gave the London-based spirits producer a valuable property in premium rum, a sector Diageo bets will grow significantly, just as premium vodka, gin and scotch have.
While 2011 hasn't turned out to be as robust for mergers and acquisitions as dealmakers expected earlier in the year, there has been a "steady stream of deals that is going to continue in 2012," predicts Sullivan & Cromwell LLP partner Frank Aquila.
There is more appetite for dealmaking now than he has seen in 10 years. "All the building blocks for transactions are in place."
Lack of business confidence - caused by concerns about the underlying economy in general, and the volatile stock market, in particular -- is what held up the boom in 2011. The role of business confidence in mergers and acquisitions is akin to the role consumer confidence plays in retail. "When consumer confidence is weak, your retail business is weak, and when business confidence is weak, the level of M&A activity is reduced because boards and management are less willing to make the decisions on deals that are necessary to make," explains Aquila.
A subtle sea change in the psychology may be underway. "There are indications now that the U.S. economy appears to be strengthening - not dramatically, but strengthening nevertheless," says Aquila. "There is some sense that while things may get worse in Europe, the affect on the U.S. economy is going to be less than previously thought."
