M&A: A shower of deals over the last two months makes it look like the M&A drought is ending. With deal data confirming a pickup in activity, it’s easy to see why bankers might think a broader M&A recovery is underway. But the evidence isn’t overwhelming. June saw the announcement of 3,500 deals worth some $211 billion, against January’s $161 billion, according to Thomson Reuters. The figures for the year to date show a more modest uptick, with 22,051 deals worth $1.2 trillion announced, against 21,659 transactions worth $1.1 trillion during the same period in 2009.
One encouraging sign is the relative frequency of bigger deals globally, as the ratio of large to small deals can be seen as a harbinger of activity. There have been 219 deals valued at $1-5 billion so far this year, and 30 worth more than that, a ratio of one to 7.3. This compares with a ratio of 1 to 6.6 in 2003, when deal-making began to recover from the dotcom collapse.
Another reason to be confident is that even though credit to fund takeovers is still relatively scarce, corporate balance sheets are healthier. UBS estimates that net debt/EBITDA for the average European corporate will be 1.2 times by the end of 2010, versus 1.5 at the end of 2009. And by 2011 this will reach a nine-year low of 0.9 times. Still, this isn’t yet translating into a material pickup in lending for acquisitions. Deal loans totalled only $78 billion in the first half, compared with $115 billion during the same period last year. That said, volumes were up over 50 per cent. Finally, equity markets appear to be more conducive. A spike in the VIX “fear index” in May could have derailed M&A but didn’t halt the deal flow. Equity market volatility hasn’t yet reached the benign levels seen from 2003 to mid-2007, but the index is falling. This doesn’t amount to convincing evidence that a full-blown M&A boom is round the corner. But a modest and uneven recovery in deal-making looks in prospect.
