By Martinne Geller
NEW YORK Dec 20 Perpetually optimistic
investment bankers are hoping a resolution to the U.S. "fiscal
cliff" and cheap, plentiful financing will fuel a rebound in
mergers and acquisitions in the spring of 2013 and set business
back on the road to recovery.
The high hopes come after a tough year for dealmakers, as
uncertainty about the euro zone, the U.S. presidential election
and deficit gave many CEOs cold feet. Global transaction volume
fell 3.7 percent this year to $2.357 trillion, according to
preliminary data from Thomson Reuters. The number of announced
deals fell 11 percent to 35,794, the data shows, its lowest
level since 2005.
Goldman Sachs and Morgan Stanley retained
their positions as the No. 1 and 2 M&A advisers globally,
respectively, this year. Barclays catapulted from No. 7
to No. 3, bumping JPMorgan Chase & Co to No. 4, the data
"M&A activity next year will be driven more by necessity
than a wholesale renewal in CEO confidence," said Scott Matlock,
chairman of international M&A at Morgan Stanley, noting that a
number of logical deals were put on hold amid the financial
crisis. "But the necessity to get them launched and executed
has, in many cases, never been higher."
IntercontinentalExchange Inc, for example, announced
a deal on Thursday to buy NYSE Euronext for $8.2
billion, a merger driven by the need for scale in the exchanges
sector. Sprint Nextel Corp also just struck a deal with
Softbank and Clearwire, to help the No. 3 U.S.
wireless carrier better compete with larger rivals Verizon
Wireless and AT&T Inc.
Deal talks have picked up over the last few months, which
could lead to announcements next week and next month and
closings in the spring, said Brian Friedman, chairman of
Jefferies Group's executive committee.
"When I look out, particularly to the second quarter, I can
feel the momentum in the flow," Friedman said on a conference
call on Tuesday. "It does just feel like it's picking up. And if
we get some good resolution on the U.S., the deficit issue, we
probably will see very solid 2013 M&A."
President Barack Obama has been in contentious negotiations
with Congress about how to deal with the nation's budget deficit
in time to avoid the "fiscal cliff" of automatic spending cuts
and higher taxes that could hit the economy next year.
Meanwhile, the Federal Reserve has signaled its intention to
hold short-term interest rates near zero for at least 2-1/2
years, prompting investors to run to corporate debt for higher
yields and driving down companies' borrowing costs to near
A top-rated industrial company, for example, can now issue
90-day commercial paper at an interest rate of 0.15 percent,
which is 10 basis points above three-month Treasury bills.
Several bankers said they eventually expect such low
borrowing costs and a need for growth in a tough economic
environment to lure companies back into the fray.
"Buybacks and dividends are not a strategy, but CEOs have
been reluctant to do huge deals," said Henrik Aslaksen, global
head of M&A at Deutsche Bank. "We can expect the
market to be more buoyant next year, with the flow of midsized
deals continuing in the more mature markets."
To be sure, bankers do not yet expect a return to the heady
days of deal making from before the financial crisis of 2008.
"In order to unblock things we need two factors: corporate
confidence and a period of sustained stability," said Goldman
Sachs' head of M&A for Europe and Asia, Gregg Lemkau.
He said the consensus view in Europe seems to have evolved
from one of "real nervousness" about the future of the Eurozone
to confidence that Europe will likely "muddle through."
"While not overly exciting, this 'muddle through'
environment may just provide that period of stability that we
need to drive recovery in M&A," he said.
Bankers said they expect more activity in the telecom
sector, as recent deals set the stage for another round of
consolidation, and in healthcare, as companies seek to rein in
costs in the face of new healthcare laws.
In addition, cross-border deals should grow rapidly as
"American companies acquire to grow in emerging markets, Chinese
state-owned enterprises secure resources abroad and European and
Japanese companies diversify away from slow-growing economies,"
said Jonathan Rouner, Nomura's head of M&A in the
The energy sector saw the most action this year, with deals
worth $444.60 billion. But that was still a decline of 8 percent
from last year. The consumer staples industry saw the highest
increase in announced deal volumes, recording a 70 percent gain,
fueled by Anheuser-Busch InBev's planned $20 billion
buyout of Mexico's Grupo Modelo and the split of
Kraft into Kraft Foods Group and Mondelez International
Spin-offs and divestitures accounted for nearly 47 percent
of all deals this year, the highest percent in 20 years, as many
entities sought to streamline their operations. In some cases,
the spins have been prompted by activist investors.
"It's a hard market in which to get complicated things
done," said Peter Tague, co-head of Citigroup's global
mergers and acquisitions team.
"Lately we've seen more large, cross-border deals that don't
succeed than those that do get to announcement," Tague said.
Anticipated deals that stalled in late stages include a bid
by Sprint for MetroPCS for some $8 billion and a deal
between Diageo and Jose Cuervo that would have valued
the tequila maker at roughly $3 billion.
At the same time a lot of auctions are ending in failure,
such as those for Allscripts Healthcare Solutions Inc,
Advance Auto Parts and Dun & Bradstreet.
Sometimes sellers set unrealistic price expectations but
other times assets just didn't attract enough bidding
competition, said Nomura's Rouner. He said sophisticated sellers
are now becoming more willing to enter private talks with
capable buyers at fair prices instead of going straight to
"There is a decent pipeline. I wouldn't call it robust,"
said Paul Parker, head of M&A and global corporate finance at
Barclays. "I don't think people have picked up their pencils
enough to fill the pipeline."