Outlook For Mergers Rises With Economy

Takeover activity picked up in the second half of the year and the momentum should carry into 2014 as the U.S. continues to lead and Europe revives, according to M&A experts.

Average monthly deal volume rose from 808 per month in the first half to 886 monthly in July through November, according to PwC, analyzing data compiled by Thomson Reuters. Activity has continued as 2013 winds down, with Ireland's Jazz Pharmaceuticals (JAZZ) agreeing to buy Italy's Gentium for $1 billion while Oracle (ORCL) reached a $1.5 billion deal for cloud-based marketing software maker Responsys (MKTG).

Takeovers have been especially brisk at home. U.S.-targeted M&A announced so far in 2013 comprised just more than $1 trillion, 11.5% over 2012, Thomson Reuters said. That's 43.4% of global M&A, the highest share in a dozen years, as the U.S. economy does relatively well while stocks boom.

Overseas Deals Weak

But worldwide, it has been a disappointing year for deal makers. Global M&A is down 5.7% vs. last year to $2.37 trillion, Thomson Reuters said. The number of deals fell to the lowest since 2005. Outside the U.S., M&A activity has fallen 15.6% to $1.34 trillion.

Europe comprised 27.3% of global activity this year and Asia Pacific 22%, according to Dealogic.

A survey of 1,000 M&A professionals, investors and advisers by accounting firm KPMG found that 56% of respondents said the U.S. will have the highest level of M&A in 2014.

But many also see an active China merger market and expect Europe deals to perk up along with their economies.

Nations such as Spain and Greece could attract private equity and other foreign investors to the distressed debt and undervalued assets as their economies recover, said London-based law firm Clifford Chance.

"It's still a relatively fragile M&A market," said Rich Jeanneret, a senior executive of transaction advisory services at Ernst & Young. "If this confluence continues, we're optimistic we could see a modest recovery next year.

Business morale, low in the wake of the recession and sluggish recovery, appears to be on the mend. An E&Y poll of U.S. executives found that 41% of them expect to engage in acquisitions in 2014, compared to 23% who expected to take part in deals immediately prior to 2013.

Training Wheels Coming Off

The U.S. jobs market and manufacturing activity generally have shown some improvement, while fiscal drag and uncertainty from Washington are waning. The Federal Reserve has said it will start to taper its monthly bond buying program in January, perhaps signaling that the U.S. economy is ready for its training wheels to come off.

Europe is growing again, albeit fitfully, after its longest recession since World War II. Although it hasn't been a great year for emerging economies such as India and Brazil, China continues to grow above 7% and its government is making moves to further liberalize its economy.

Telecommunications and real estate have been M&A leaders this year. Telecom deals more than doubled to $266.4 billion. That's largely due to Verizon Communications' (VZ) $130 billion buyout of Vodafone's 45% stake in Verizon Wireless.

Real estate deals are up 43.1% beyond 2012, comprising 13.9% of global M&A.

Health care M&A has had a down year due in part to the lingering uncertainties about ObamaCare. Deals are down 4.7% vs. this point in 2012.

The money is there for M&A, with companies around the globe sitting on an estimated $6 trillion cash and the credit markets having healed from the recession. But one key ingredient has been missing: confidence.

"Just because all the fundamentals are in place for a strong M&A market doesn't always mean it happens," said Brian Levy, an M&A partner at PwC. "An uncertain economy with a bunch of geopolitical shocks, that makes CEOs and CFOs want to keep their cash close to the vest.

Surging stock markets — the S&P 500 is up roughly 29% so far this year — have made potential targets more expensive, but also boost confidence, encouraging deal-making.

Even though market conditions in the U.S. and elsewhere aren't ideal, at least they now are predictable, Levy said.

"Everyone knows what the problems are," he said, adding that mergers will continue happening "so long as there are no new surprises."