The last 12 months have been a mixed bag for the corporate mergers and acquisitions (M&A) market.
According to M&A analysis publication Mergermarket, global M&A activity was down 2.7% in 2012 and saw the lowest deal values across the board since 2010. In the U.S., the overall market fell 4.7% for the year with $768.9 billion worth of deals, while private equity buyouts slipped 13.3% to a two-year low.
But things turned up big time in the second half of the year. Global deals volume spiked 45.6% in the fourth quarter vs. the same period a year ago and jumped 39.5% quarter-to-quarter following Q3, while the strong yen-USD exchange rate facilitated a 218.4% surge in Japan-based deals in the U.S. Both Asia-Pacific and the emerging markets saw M&A volume increase in 2012, up 2.5% and 5%, respectively.
All of this bodes well for the year ahead.
“Cautious confidence is gaining among M&A practitioners for 2013,” said Giovanni Amodeo, global editor-in-chief for Mergermarket. “While a full recovery is yet to be seen, the recent agreement to avoid the fiscal cliff in the U.S. and the increased stability in the Eurozone are all positive events that can encourage corporations to do more transactions.”
Strong Fundamentals Remain
But some analysts worry that the market isn’t entirely out of the woods yet. One concern is that the Q4 spike was due in part to corporates pushing to get deals done ahead of the capital gains tax uncertainty in 2013. As a result, the market could drop off sharply in Q1.
“If you were in the process of doing a deal in the second half of 2012 you would likely have pulled it forward to finish when there was more certainty,” says Martyn Curragh, PwC’s U.S. transaction services leader. “So that sucked forward some deals that would otherwise have closed in Q1, and it could take some time to catch back up.”
Still, Curragh says he’s “relatively optimistic” about the next 12 months and believes that the necessary fundamentals for a strong M&A market are in place. GDP growth is expected to be in the 2-3% range in 2013, up from 1-2% last year, and interest rates remain low.
“A year ago we saw plenty of cash on corporate balance sheets, private equity had a lot of money to invest, and interest rates were very low, so we thought we were set up for a pretty good year,” he says. “What got in the way of that were a lot of macroeconomic issues – the situation in Europe, uncertainty around the U.S. elections and the fiscal cliff.”
Absent those speed bumps, Carragh says, 2013 should line up to be the year that 2012 never was.
M&A attorney Andrew Apfelberg, with L.A. firm Greenberg Glusker, agrees.
“Many of the reasons people wanted to sell in 2012 remain,” he says, “and though they could not get their deals done in time for the December 31 cutoff, they still want to get them done before any other laws change. Also, they now have a few years’ worth of year-end financials since the trough in 2008 that they can show in diligence to tell the story that they survived the worse and climbed out of it.”
The Money Is Waiting
The buyers are ready. Private equity firms and other potential buyers are well positioned for an active M&A year – flush with cash and with access to more ready financing (especially for lower and middle market buyers) – and are generally more confident in the direction of the U.S. economy. If nothing else, at least now we know who will be running the show in Washington the next two years.
“With 30 years in this business I hesitate to say this, but interest rates are as low as I’ve ever seen,” says Larry Mock, managing partner with Atlanta-based private equity firm, Navigation Capital Partners. “And when purchase multiples remain the same but interest rates are low, as we’re seeing now, that’s a real advantage to the buyer.”
Whether or not rates stay low remains to be seen, as evidenced by the minutes of the Federal Reserve’s December monetary policy meeting released Thursday that suggested that the central bank’s quantitative easing programs may be coming to an end eventually. Still, Mock isn’t worried about that in the short-term – after all, the Fed in December announced plans to extend its monthly purchases of mortgage securities and Treasuries.
“I don’t think 2013 will be a year when we worry about interest rates,” he says, “but I’m very concerned about it beyond that. But that’s a problem for another day.”
Pension funds are also finding their way back into the private equity space after five years away, in search of better yields to meet their payout obligations. That’s good news for PE firms, where public pension funds often account for more than half of available funds, and is providing PE investors with a fair amount of new capital for investment this year.
“You either invest it or you lose it,” Mock says, “and we’re still at the front end of that trend. That should increase M&A activity and make for a good market in 2013.”