Deal talk: Market fears damp optimism on merger Monday

NEW YORK Mon Aug 15, 2011 5:05pm EDT

A trader is seen in silhouette outside the New York Stock Exchange August 8, 2011. REUTERS/Shannon Stapleton

A trader is seen in silhouette outside the New York Stock Exchange August 8, 2011.

Credit: Reuters/Shannon Stapleton

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NEW YORK (Reuters) - Dealmakers are worried about market volatility and its impact on mergers and acquisitions in the second half of the year, drawing little solace from a spate of transactions announced on Monday.

Google Inc (GOOG.O) surprised the market with its largest deal to date, a $12.5 billion acquisition of phone hardware maker Motorola Mobility Holdings Inc (MMI.N).

Other deals included Time Warner Cable Inc's (TWC.N) purchase of Carlyle Group's CYL.UL cable operator, Insight Communications, for $3 billion, Cargill Inc's CARG.UL deal to buy animal feeds producer Provimi from private equity firm Permira for 1.5 billion euros ($2.1 billion) and Transocean Ltd's (RIGN.VX) $1.43 billion bid for Aker Drilling ASA AKD.OL.

It was the biggest "Merger Monday" in the United states since April 4, according to Thomson Reuters data.

The spurt of deals lifted the stock market and gave bankers and lawyers some optimism M&A will not be derailed by last week's market gyrations, but they said volatility remains a big risk to dealmaking.

These deals were likely in the works for some time, dealmakers said, adding that for every deal announced, many fell by the wayside in the past few days.

"Given the recent volatility and pull-back in the financing markets, there undoubtedly has been an impact on the M&A markets," said Ehren Stenzler, co-head of U.S. M&A at UBS AG (UBSN.VX). UBS advised Insight on its sale to Time Warner and Virgin Media Inc VMED.O on the sale of its stake in UKTV to Scripps Networks Interactive Inc (SNI.N).

"Despite a busy Monday morning -- these market dynamics clearly aren't helpful for getting deals done generally," Stenzler said. "However, despite the volatility, for deals that are strategic they can and will still get done."

Jeffrey Raich, a founding partner at Moelis & Co, added: "If we see volatility go down I do think that, post Labor Day, we will see a surge in M&A activity."

M&A volume has blasted past 2010 thanks to the surge in transactions in the first few months of the year. Deal volume is up 31 percent so far this year worldwide to $1.79 trillion, compared with $1.37 trillion the same period a year ago. U.S. deal volume alone is up 76 percent.

Deals are being stoked by companies' cash balances remaining high, the continuing availability of cheap debt for corporations with good credit, a narrowing valuation gap between buyers and sellers and a search for growth by companies in a weak economy.

"This year is clearly a better year for M&A than last year," said Frank Aquila, M&A lawyer at Sullivan & Cromwell. "(All the) fundamentals are there for a strong M&A market and that will continue and nothing that has happened over the last 10 days really changes those fundamentals."

But wild swings in stock markets and a pull-back in financing in the last few days has given a lot of chief executives and their boards a pause, dealmakers said.

Many companies in the early stages of deal talks have pulled back, sometimes to buy back stock as the markets plunged.

They are also waiting to ride out the traditionally slow summer month of August and see how the market behaves after Labor Day in September before restarting any talks for deals, dealmakers said.

"If you had a deal that was in the works and it was still early to middle stages, chances are that's gone on hold," said David DeNunzio, vice chairman of Credit Suisse's (CSGN.VX) M&A group. "Most people are saying, 'Let's give it 30 or 60 days and see where the markets settle out and where we are.'

"If you had a deal that was real close, most people are going to try to push those through. Those kinds of deals will forge through, but they will be fewer and far between."

(Reporting by Megan Davies and Paritosh Bansal; editing by Andre Grenon)

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