A rash of deal activity, especially larger deals, has
occurred this month with the Dell, Heinz and Comcast announcements. This increase,
which actually started in 4Q12, if sustained, could see 2013 deal flow reach a
post crisis level not seen since the credit crisis. Care is needed in M&A
predictions, however, as a rebound has been projected for the past several
years. This time, the rebound seems likely to last for the following reasons:
1.
Reduced, albeit still significant, macro
political and economic uncertainty.
2.
Significant pent-up demand given years of
depressed activity.
3.
Pent-up need for consolidating M&A in
several industries including tech, consumer products and banking to offset
growth and margin pressures.
4.
Improved financing conditions. Bankers and
investors, in general, are searching for yield in a low return environment
given their improved financial condition following massive credit crisis
losses. The focus has shifted to return on capital instead of return of
capital. Consequently, the return of cheap and plentiful financial capacity to
fund the $23B Heinz LBO at an aggressive 6X funded debt to EBITDA level.
5.
The stock market has finally recouped its crisis
related losses after 5 years. M&A and the stock market are both reflections
of investor confidence.
6.
Corporate balance sheets and earnings remain
robust. Hence, deal and debt capacity are strong and permits larger deals.
7.
Investor reaction to recent announcements has
been unusually positive. Buyer shareholders are suspicious of M&A
announcement given the propensity to over pay. Thus, buyer stock prices
frequently decline. Current deals, occurring earlier in the cycle, appear to
have lower price risk and better strategic rationale than deals in general.
Therefore, buyer’s share prices have actually increased following the deal announcements.
This will not go unnoticed by other potential buyers. Of course, the potential
for an over-priced HP-Autonomy deal is never more than a click away.
8.
Momentum feeds on itself. A combination of
confident buyers combined with liquidity provided by yield seeking investors
will support a herding effect which can last for a considerable period.
The most likely result is an
upturn in the M&A cycle which builds over the next few years. The speed and
magnitude of the rebound are unknown. As in previous cycles, the best (i.e.
reasonably priced) deals are made earlier in the process. It appears 2013 may
actually be the real deal. This is good news indeed for revenue starved advisors,
banks and investors at least in the short run.
j
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