As 2011 drew to a close, the deal community was preparing for a 2012 that bankers and lawyers were predicting would likely be the busiest year for M&A since the start of the financial crisis. All signs pointed to a year that would be marked by a resurgence of M&A activity, not only in the U.S., but around the world.
After several years of low M&A volumes, dealmakers had themselves convinced that leisurely weekends would become distant memories and that Mondays would once again be "Merger Monday." In the end, M&A activity in 2012 was rather anemic.
Corporate and financial buyers alike entered 2012 with more than just a positive outlook. Economic fundamentals were fueling expectations for a big year in the deal world. Corporate buyers had cleaned up their balance sheets and generally had more than sufficient cash on hand to do deals. In addition to the means to do deals, strategic buyers also had the motive to do deals. No growth in Europe and low growth in North America meant that for companies in those regions, acquisitions could provide increased revenues and profits that were unavailable from organic growth.
Acquisitions could also provide access to emerging markets in Asia and Latin America. For companies in Asia and Latin America, the need for energy and other raw materials, coupled with a desire to expand their global presence, were also expected to be catalysts for more than a few cross-border transactions.
Beyond strategic buyers, private equity funds were flush with capital and were eager to put their investor's money to work. In addition to cash on hand, strategic and financial buyers both had access to ample financing on historically favorable terms. With a steadily improving economy, an increasing appetite for risk and stable capital markets, the 2012 M&A scene appeared very bright. At the very least, it was far brighter than any point since the start of the 2007 credit crunch.
Alas, 2012 did not turn out to be the boom year that most had anticipated. Instead, continuing instability in the Eurozone and uncertainty in the U.S., as a consequence of both the presidential election and the looming fiscal cliff, created sufficient anxiety to make most prospective buyers opt to hold on to their cash and hold off on their acquisitions. With 2012 now in the history books, what can we look forward to in 2013? Caution, borne of the financial crisis and the conflicted nature of the markets over the last several years, leads us to a best case and worst case approach to making any predictions for 2013.
First, the worst case scenario. What had to happen for the worst case scenario to unfold? If President Barack Obama and Congress had failed to avert the fiscal cliff, or came up with a package that was decidedly anti-economic growth, and the Eurozone sovereign debt crisis proliferated, then we would have likely seen the worst case scenario for both mergers and acquisitions as well as the broader capital markets. Deal activity would drop further and only the most robust credits would be able to finance their acquisitions. This scenario would feel a lot like the rather dismal first half of 2009. Deals would continue to happen, but big public company deals would be few and far between. Private equity and strategic buyers alike will eschew leverage, if they can obtain the financing at all. Recession fears, both in the United States and Europe, will make buyers unwilling to pay significant premiums, while depressed valuations will make target companies reluctant to sell.
Second, the best case scenario. Since the fiscal cliff was largely avoided thanks to the eleventh-hour passage of the American Taxpayer Relief Act of 2012, we're closer to the best-case scenario. However, the deal that Congress and the President put together has to, at worst, cause no harm. Also, the euro has to hold together, economic growth will need to pick up enough to provide meaningful job creation and prospective buyers will need to continue to have access to debt capital on reasonable terms. All of these factors are readily achievable and could, after five years of limited deal activity, produce a significant rise in M&A activity. The means and motives to make acquisitions remain.
While a lot could still go wrong, there is a high likelihood that we will indeed remain in the best case scenario, or at least much closer to the best case than the worst case scenario. The biggest risk is that the folks in Washington simply messed it up and saddled the country with a "fix" that puts us back into recession. While neither political party wants that, political jockeying has a way of backing our elected officials into tight corners. Bad political choices produce bad policy.
Although 2012 was disappointing to the M&A community, hope is not lost. Buyers, both strategic and financial, have the financial wherewithal and strategic desire to do deals. What we need now is stability in the capital markets and increased global economic growth. If that should occur, 2013 could be the year that we all expected in 2012.