PHILADELPHIA/LONDON This year is set to be a blockbuster for deals, exemplified by mega acquisitions such as T-Mobile USA or Genzyme, with turmoil in the Middle East and Japan causing just a temporary slowdown.
Worldwide mergers and acquisitions (M&A) have risen 58 percent so far this year, according to preliminary data from Thomson Reuters, marking the best start to a year since 2007 and building on last year's tentative recovery.
A doubling of deal volume in the United States and Europe, which was hobbled in 2010 by the sovereign debt crisis, as well as big deals such as AT&T Inc's (T.N) $39 billion bid for T-Mobile USA, helped push announced worldwide M&A to $717 billion so far this year.
"We expect the M&A market will continue to be robust for the balance of 2011. All the fundamentals exist -- improving economy, improving credit environment, high CEO confidence," said Jack MacDonald, Bank of America Corp's (BAC.N) co-head of Americas mergers and acquisitions.
"Given these fundamentals, global M&A could be up in excess of 20 percent in 2011," MacDonald said.
Other bankers estimated deal volume would rise 10 percent to 15 percent this year.
The first quarter was marked by large cross-border deals, including Sanofi-Aventis SA's (SASY.PA) $20.1 billion acquisition of Genzyme Corp GENZ.O.
In a sign the financing markets are better than ever, JP Morgan underwrote a $20 billion bridge loan for AT&T, the bank's largest ever acquisition-related financing commitment.
Rick Leaman, a managing director at Moelis & Co, likened the T-Mobile USA deal to Procter & Gamble Co's (PG.N) acquisition of Gilette, which he said reopened the M&A market in 2005.
"It feels like a typical M&A recovery; maybe not as robust as it was in the mid 2000s or 1995-1996, but based on our backlog and what we're seeing in the market, activity levels are definitely improving," Leaman said.
JAPAN, MIDDLE EAST WEIGH NEAR-TERM
Still, conflict in the Middle East and the crisis created by the earthquake and tsunami in Japan could curtail dealmaking in the short-term.
"The overall year should be up, but these are very significant and serious events, and the kind of volatility they are causing (will) have some effect" on M&A discussions, said Robert Kindler, Morgan Stanley's (MS.N) global head of M&A.
Indeed, United Arab Emirates telecommunications company Etisalat (ETEL.AD) scrapped its $12 billion bid for a controlling stake in Kuwaiti rival Zain (ZAIN.KW) last week, citing unrest in the region as one of its reasons.
State-owned China Guangdong Nuclear Power may cut its offer for uranium miner Kalahari Minerals in light of Japan's nuclear crisis and lending banks are unwilling to underwrite Bain's $3.4 billion buyout of Japanese restaurant chain Skylark.
Mergers in the Asia Pacific region have reached $89 billion so far this year, up 25 percent from the year-earlier period.
Giuseppe Monarchi, head of M&A for Europe, Middle East and Africa at Credit Suisse, singled out opportunistic deals as more likely to be affected by events.
"M&A is not a decision you take lightly in any event. This is more likely to have an impact on more opportunistic deals, with a shorter-term focus, than those based on long-term strategic rationale," Monarchi said.
Rising oil prices could also have a cooling effect on near-term M&A, according to Stephen Trauber, global head of Energy at Citigroup Inc (C.N).
Energy and power, as well as financial institutions, were the busiest sectors for dealmaking in the first quarter, according to Thomson Reuters. Bankers expect these areas to remain active, along with healthcare and technology.
This year has also seen companies focus more on their core businesses and sell or spinoff other units. An example is Sara Lee Corp's SLE.N plan to split into two public companies.
Liam Beere, co-head of Europe, Middle East and Africa M&A at UBS AG UBSN.VX, added that vendors were more motivated to sell than they were 12 to 18 months ago because the price gap between buyers and sellers had narrowed and "assets are more sensibly valued."
European activity was back to a more normal 25 percent of global dealmaking as long-expected transactions such as LVMH Moet Hennessy Louis Vuitton SA's (LVMH.PA) offer for Italian luxury goods company Bulgari SpA BULG.MI emerged.
"A transaction involving T-Mobile or Bulgari has long been anticipated. We should brace ourselves for more deals like this, where the question is when and not if a transaction will happen," said Hernan Cristerna, head of M&A for Europe, the Middle East and Africa at JP Morgan.
(Additional reporting by Megan Davies and Michael Erman; editing by Andre Grenon)