In February it looked like the year was off to an upswing in
merger activity, sparked by Berkshire and 3g's $28 Billion acquisition of Heinz
and Dell's $24 Billion LBO. Six months out finds the Heinz deal closed
and the Dell LBO awaiting a shareholder vote. Meanwhile overall merger
activity is down for the year. As the headline of Tuesday's New York
Times States, Merger
Activity Was Down But Not Out, in the
first half of 2013.
It is interesting that many factors are in place that are
associated with greater deal activity. Interest rates are low
facilitating demand. Stock prices are high and historically the number of
deals has been strongly correlated with the general level of stock prices.
In addition, companies are sitting on record amounts of cash. All
of these factors should signal a strong robust market. Why haven't they?
One explanation is that firms have been restructuring themselves
rather than acquire other firms. There has been some increase in share
repurchases - companies essentially buying themselves. Plus, this year's merger numbers may be a bit distorted, as there was increased activity in the 4th
quarter of 2012 as companies rushed to avoid the fiscal cliff. I think a
bigger factor is general uncertainty about the state of our economy. It
is difficult to plan in the face of great uncertainty and there is much to be
uncertain about. Not in any order of priority, let's consider a few reasons for reduced activity.
First is the increased regulatory environment. We haven't
witnessed such an environment in recent history. What is worse is that so
many of the regulations coming down the pike are unknown. Over two thirds
of the Dodd Frank Act remains to be written. Bank M&A still
lags largely due to regulatory approval uncertainity.The deals being done are
very small. We can adapt and adjust to most any set of
rules but when the rules change in the middle of the game it is hard to plot
your strategy. The same could be said for the new health care laws, etc.
Second, is the
economy itself. The Fed and Quantitative Easing have increased uncertainty. The recent 80 basis point increase in the 10
year t-bill (140bp+ on BB credits) will curtail the level and types of
deals (e.g. covenant lite and PIK) funding. This is a big thing and will require
big adjustments. During the interim it is sure to depress deal activity.
Government intervention in markets means ‘artificial’ and that is not a word associated with market
equilibrium. See point one.
Third is the political uncertainty in the world. European deals have really suffered. Of the three points mentioned, this is
the one that feels most like something we've seen before. But even here
we see technology shaping political unrest and revolution in ways
that couldn't have been imagined a few years ago. At the same time, we
are increasingly aware of the technology used by our governments and by
businesses themselves to track our movements. This could turn out to be necessary,
even beneficial, but it is unsettling.
My colleague, Joe Rizzi, also mentions a possible behavioral
angle. Managers who experienced the
recent crisis have become ‘depression babies’ and may have a reduced appetite
for M&A risk.
Those are just four items leading to a feeling of unease and
increased risk. There are signs of optimism for dealmakers, but it may
take positive thinking to see them. Risk means opportunity and deals are
being completed, particularly in certain sectors of the economy.
Well-conceived and well-executed mergers create value and as we've noted
before, regulatory, economic and political shocks are often catalysts for increased merger activity. Let's
see what the second half of 2013 brings.
Happy 4th of July, America!
Ralph
