Tuesday, July 9, 2013

Where's the Surge in M&A Activity?

Among the factors that many strategists cite for their bullish outlook is the possibility of a surge in Mergers and Acquisitions (M&A) activity.

Surely, these folks argue, the combination of low interest rates, relatively attractive level equity valuations, and the trillions that corporations are holding on their balance sheets should lead to a wave of M&A deals.

Moreover, most companies are struggling to find revenue growth.  What better way to improve top-line results than buying another company?

But so far, at least, M&A activity has been relatively muted.

Here's an excerpt from today's New York Times Dealbook blog, citing a survey from the accounting firm Ernst & Young:

But this is now the sixth-straight year of declining deal volumes, Ernst & Young says in the report. In the United States, the number of deals in the first half of the year decreased 3 percent from a year earlier, the report said.
Still, the value of United States deals in the first half rose 29 percent, helped by a few large transactions, according to the report. (Worldwide, the value of deals was down, according to Thomson Reuters.)
Those big deals aside, companies are likely to play it safe, with “laser-focused” or “tuck-in” deals, Mr. Jeanneret {of E&Y} said.
In a survey of corporate executives this year, Ernst & Young found that 76 percent expected the overall volume of mergers and acquisitions to improve, but only 29 percent expected to do a deal in the next 12 months. That suggests a “you go first” mind-set, Mr. Jeanneret said.

One of the areas where I have been expecting M&A has been in the banking sector. With narrow interest margins and increased regulatory burdens, it would seem only natural that smaller banks would try to merge, and achieve more economies of scale.

Yet banking mergers in recent years have been relatively scarce.  Most bank CEO's are painfully aware that many banking deals have not turned out as planned. Not have the promised cost savings failed to materialize, but often the acquiring bank finds to its dismay that its new partner had more credit issues than originally anticipated.

So it may be the dawn of M&A may be further away than we anticipate.