M&A Slowdown Just a Pause?

Despite a fourth-quarter lull, transaction advisers say acquirers and sellers are primed for deals.

Will there be a flurry of dealmaking activity after the holidays? Possibly not. While companies say they are on the prowl for investments and ready to execute an acquisition quickly, only 41% of the respondents to a recent Ernst & Young survey plan to buy in the next 6 to 12 months. That’s down from 57% in April, despite better credit conditions now than in the spring and a more-optimistic outlook from economists.

Merger and acquisition activity has been solid in 2010, especially in certain areas abroad. With one week to go, global takeovers in 2010 have totaled $2.24 trillion, up 19% from 2009, says Thomson Reuters. The value of deals targeting U.S. firms rose 11% (to $773 billion), but the real burst was in mergers of emerging-market companies, with $379 billion of deals taking place. In the BRIC countries (Brazil, Russia, India, and China), inbound and outbound deals rose 46%.

But the final quarter of 2010 has seen M&A slow more than usual. Globally, fourth-quarter activity fell 11% from a year ago, to $529 billion. U.S. targeted deals dropped 17% and emerging-market acquisitions fell 24%, according to Thomson Reuters.

E&Y’s transaction advisory services group blames the pause on deepening European sovereign-debt concerns during the fourth quarter. Indeed, acquisitions targeting European Union companies were up only 5% this year compared with 2009. The fourth quarter was flat compared with last year, at $144.4 billion.

A bigger driver of restraint worldwide could be the lack of confidence by boardrooms and management, says E&Y’s Capital Confidence Barometer. Persistent U.S. unemployment, regulatory changes, and government austerity budgets are causing hesitation among dealmakers. Also, many companies are allocating their capital to growing organically next year. The recently released Duke University/CFO Magazine Business Outlook Survey found that half of U.S. finance chiefs plan to spend some of their accumulated cash in 2011, but only one-third say it will go toward acquisitions.

The M&A market could easily rev up again after New Year’s. E&Y says corporations are just waiting to pull the trigger on new deals. The Capital Confidence Barometer shows that 50% of companies say they could execute a deal on short notice, up from 36% one year ago.

Steven Brady, a national managing partner at Grant Thornton, says private-company sellers are also preparing for transactions. They are starting to see the value of bringing in due-diligence experts early, even before taking their firm to market, he says. “It positions the company for a better sales process, and provides speed to close and certainty to close,” says Brady.

But what will it take for firms on both sides to press the button? A combination of factors would ignite confidence in the M&A markets, says Steve Krouskos, global and Americas leader for E&Y’s transaction advisory services. The steady upward trend over the past several months in the Dow Jones Industrial Average, for example, is good news, because historically there’s a strong correlation between the Dow and M&A, he says. An improvement in retail sales, more clarity around the U.S. tax bill, and a little more clarity on the European economic situation would also help. “Combine all of that with the pickup we’ve seen in private equity, and you will see corporates start to move off the sidelines,” says Krouskos.

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