NEW YORK Dealmaking around the world was basically flat over the first nine months of the year, a disappointing level given the $130 billion Verizon Communications Inc (VZ.N) transaction that bolstered mergers and acquisition volumes in the third quarter.
With ongoing uncertainty about economic recoveries around the globe, the specter of rising interest rates as well as increasingly activist investors clamoring for a return of capital to shareholders, top investment bankers and lawyers do not expect a significant pickup in deal activity soon.
"Between increased rates, and, at times, unpredictable deal-approval regulatory framework, and continued debt ceiling issues, we're back in the annual dance of uncertainty," said Paul Parker, head of global corporate finance and M&A at Barclays. (BARC.L)
"The silver lining is that the Fed has made it clear that they're not going to pull back on easing near-term. And therefore, companies probably do have a window to take advantage of the rate environment which is still historically low," he said.
Some companies have been taking advantage of cheap financing to make cash bids. Verizon's mammoth deal to buy Vodafone Group (VOD.L) out of its U.S. wireless business, history's third largest corporate deal announcement, illustrates this trend.
The conventional wisdom that the U.S. Federal Reserve might taper its bond buying, which would have resulted in higher interest rates, could have spurred some companies to do some of these deals before the Fed's September meeting.
"The prospect of a taper seemed to crystallize for some buyers the impact higher rates would have on the economics of cash transactions," said Anthony Whittemore, co-head of mergers & acquisitions for the Americas at Deutsche Bank (DBKGn.DE).
Ironically, he said the possibility that the Fed may wait months until a taper could lull some companies back into inactivity.
"The Fed's decision to defer may have taken some of the pressure off as buyers anticipate a longer period for the current interest rate environment," Whittemore said.
Through September 24, global deal volume rose 0.8 percent to $1.67 trillion so far this year, up from $1.66 trillion a year earlier, according to Thomson Reuters data. Excluding the Verizon-Vodafone deal, global deal volume fell 7 percent to $1.54 trillion. (Graphic: link.reuters.com/kyb46q)
The total number of deals so far this year has fallen 9.6 percent to 25,374.
"Boards and CEOs don't have great confidence in the economy right now, they don't have confidence that we have a strong recovery going on and that it's going to sustain itself," said Scott Barshay, head of corporate department at law firm Cravath, Swaine & Moore LLP.
UNEVEN GLOBAL RECOVERY
Goldman Sachs Group Inc (GS.N) was the top M&A adviser worldwide, with $509.7 billion worth of deals over the period. JPMorgan Chase & Co (JPM.N), Bank of America Merrill Lynch (BAC.N), Morgan Stanley (MS.N), and Barclays (BARC.L) rounded out the top five.
Deals in the Americas rose 18 percent to $910.9 billion, and accounted for 54 percent of global dealmaking in 2013. The United States performed particularly well, rising 35 percent year over year, and the region would have seen a double digit increase over the period even excluding the Verizon-Vodafone deal.
"The M&A story is a little bit of a regional story where activity is up disproportionately in the Americas, compared to Europe and Asia Pacific," said Patrick Ramsey, co-head of Americas M&A at Bank of America Merrill Lynch. "The big difference is that the recovery here began earlier and is on firmer footing than Europe overall."
Mergers and acquisitions fell 24 percent in Europe to $383.3 billion, although dealmakers say that for the first time in a long time, clients in the region area showing a rebound in sentiment. For instance, in addition to the Verizon deal, Vodafone struck 7.7 billion euro deal to buy Kabel Deutschland (DTEGn.DE), and French ad agency Publicis (PUBP.PA) $35 billion merger with U.S. agency Omnicom. (OMC.N)
"All things seem to point to a future increase of M&A activity," said Gilberto Pozzi, head of M&A, for Europe, the Middle East and Africa at Goldman Sachs.
"The conditions for healthy M&A are there, if people decide to act on them is another question, but certainly in terms of dialogues we're having they're as good as they've been in the recent past," Pozzi said.
Deals in the Asia-Pacific region dipped 8 percent to $269 billion.
ACTIVISM ON THE RISE
An additional headwind facing many companies considering large or complex deals is the prevalence of activist investors.
Dealmakers said they have recently spent more of their time discussing activism and its defense with clients. Worries about how shareholders might react to deals have delayed timing or scuttled deals that would have been consummated previously, they said.
Indeed, in the United States, Michael Dell's $25 billion offer to take Dell Inc DELL.O private as well as the $4.7 billion offer for Smithfield Foods Inc SFD.N by China's Shuanghui International (000895.SZ) were challenged by activists after they were announced.
"Directors today, in general, are doing an excellent job in their oversight role, whereas 15-25 years ago there was much more rubber stamping going on. The result of that though is that management teams can be hesitant to bring deals to boards of directors, unless they're perfect or near perfect," said Cravath's Barshay.
U.S. regulators are also complicating deals. The U.S. Justice Department sued to block American Airlines (AAMRQ.PK) and US Airways' LCC.N proposed merger in August after squeezing concessions out of AB Inbev in its deal for Modelo earlier this year, and a U.S. court halted Vivendi SA's (VIV.PA) $8.2 billion deal to sell most of its stake in Activision Blizzard Inc (ATVI.O) back to the videogame publisher earlier this month.
"We're seeing more activism out of the antitrust regulators and as a result, fewer deals are being pursued because of fear that the regulators will just turn them down or demand too high a price," Barshay said.
There were some bright spots: real estate and health care deals rose 42 percent and 30 percent from last year, respectively. Private equity-backed deals were up 16 percent year over year with $238.2 billion of transactions, including Berkshire Hathaway Inc (BRKa.N) and 3G Capital Partners' $27 billion takeover of HJ Heinz Co.
And deals over $5 billion rose 16 percent to $498.7 billion.
Bank of America's Ramsey said he believes the increase in the largest deals foretells a pickup in coming quarters for M&A activity in general.
"Overall deal activity is a good barometer of CEO and board confidence, but big deal activity -- $10 billion and plus -- is the best barometer of CEO and board confidence, and we've seen more big deal announcements this year, year to date, than any year since 2008, prior to the onset of the financial crisis," he said.
(Reporting by Michael Erman and Soyoung Kim in New York, Additional reporting by Anjuli Davies in London; Editing by Leslie Gevirtz)