| NEW YORK/LONDON
NEW YORK/LONDON Mergers and acquisitions activity fell 25 percent worldwide in the first half of 2012 as global economic uncertainty reined in companies' expansion plans -- and bankers don't expect much improvement over the rest of the year.
Announced deals totaled slightly more than $1 trillion globally through June 19, down from $1.33 trillion over the same period last year, according to preliminary Thomson Reuters data.
The drop in dealmaking is bad news for banks already contending with a financial crisis in Europe, worries about growth in Asia and a U.S. economy that has taken a turn for the worse in recent months.
Goldman Sachs (GS.N) was the top M&A adviser worldwide, and Morgan Stanley (MS.N) took the second spot for the first half. The two banks held the same spots in the league table in the first half of 2011.
Bankers said they expect three more slow months, a shift from the rebound they predicted after seeing weak first quarter M&A volumes.
"There is no obvious catalyst for a fast rebound in M&A. The trend is for slow growth, with weekly volumes gradually increasing," said Henrik Aslaksen, global head of M&A and head of corporate finance, EMEA at Deutsche Bank.
It's an odd time for a slowdown. Stockpiles of cash on balance sheets and a recent pullback in market values would normally be seen as creating a buying opportunity. But bankers say executives are staying cautious.
"Despite most fundamentals continuing to be aligned, the second half of the year should be roughly consistent with the first half of the year," said Stefan Selig, Executive Vice Chairman, Global Corporate & Investment Banking, Banking at Bank of America Merrill Lynch (BAC.N).
Selig said M&A volumes are likely to be down more than 25 percent in the U.S. and even more so in Europe and Asia in the second half.
U.S. DOWN 44 PERCENT
U.S.-targeted M&A fell particularly sharply in the first half, dropping 44 percent from last year.
With only $299 billion in deals over the period, it was the slowest first half in the U.S. since 2003, and marks a nearly 70 percent drop from peaks reached in the first half of 2007.
Ironically, the relative calm in U.S. markets may be having a negative effect on M&A volumes there, according to Joseph Frumkin, managing partner of Sullivan & Cromwell's mergers and acquisitions group. He said that European volumes have been boosted by deals done by companies facing dire situations if they don't act.
"The problem with the U.S. M&A is people don't feel compelled to do transactions, because things aren't that bad," Frumkin said. "But people also don't feel sufficiently confident about the future global economic direction to have a high desire to do deals. When you combine those two things, it creates low deal volumes."
EUROPE DOWN 7.0 PERCENT
European M&A volumes were only down 7 percent at $354 billion over the same period, boosted by some of the largest deals during the first half.
These included commodities trader Glencore's (GLEN.L) proposed $30 billion takeover of miner Xstrata XTA.L - the largest deal of the year so far - and French utility's GDF Suez's GSZ.PA $10 billion deal for Britain's International Power IPR.L.
Still, bankers were cautious given the challenges facing the region.
"Pipelines have flattened in the last few weeks and year to date we remain slightly below last year," said Giuseppe Monarchi, co-head of EMEA M&A at Credit Suisse CSGN.VX. "Our sense is that European M&A is unlikely to recover markedly during the second half; however, the comparison with last year will be easier as activity in H2 2011 was very muted, with the onset of the sovereign crisis."
The uncertainty in Greece and elsewhere is being closely watched by executives and boards operating in the region.
"Clients are ready to engage, but they are also very cautious given macro uncertainty. Any unexpected outcome in Greece and the knock-on effects of wider contagion wouldn't be conducive to a recovery in M&A markets," said Hernan Cristerna, head of EMEA M&A at JPMorgan (JPM.N).
ASIA DOWN 23 PERCENT
Deal volumes in Asia Pacific (excluding Japan) fell 23 percent to $175 billion over the period ended June 19.
While Chinese companies were the most targeted, deal volumes in Indonesia and Malaysia saw a huge pick up, underscoring Southeast Asia's strong growth profile.
"The intra-Asia deal flow, particularly that in SE Asia, remains resilient and is helping to compensate for the slowdown in activity between Asia and Europe," said Citigroup's head of Asia-Pacific M&A, Colin Banfield. "There is strong demand for businesses being offloaded in southeast Asia. Everyone wants to increase exposure to the region, the issue is scarcity of assets," he added.
ENERGY AND MATERIALS RELATIVELY STRONG
Energy and power deals accounted for around $188 billion, or 19 percent, of the first half M&A volume. Still, deal activity in the space was down 28 percent from the same period in 2011.
Materials deals fell 23 percent to $141 billion, while financial deals dropped 41 percent during the period to $118 billion.
Private equity-backed acquisitions fell 19 percent to $102 billion over the period and accounted for roughly a tenth of overall deal volume.
Meanwhile, retail companies are proving to be a bright spot in the gloomy private equity-backed market, with at least half a dozen deals in the $1 billion-range struck since May.
After the first quarter, bankers had expected that an improving U.S. economy and a possible solution for Europe's debt crisis would drive up deal volumes and fees for banks. That turnaround fizzled.
"The tonality has changed and it hasn't changed for the better," said Peter Tague, co-head of Global M&A at Citigroup (C.N).
"I'm a serial optimist but until there is greater clarity on some of these macro issues, I think the market is going to remain cautious."
(Additional reporting By Nadia Damouni in New York and Denny Thomas in Hong Kong; Editing by Alwyn Scott, Bernard Orr)