M&A Surge to Continue in ’07

The dealmakers behind mergers and buyouts predict the pace of transactions will increase for the next six months.
Sarah JohnsonJanuary 10, 2007

New Year’s Day may have come and gone, but dealmakers would be wise to restock their champagne cellars right away. The high levels of merger-and-acquisition activity that characterized 2006 will likely continue, even grow, through the first half of this year, according to the Association for Corporate Growth. And the main drivers of the deals — private equity firms — will continue to be big players, the member association predicts.

Nearly half of the 1,230 private equity professionals, investment bankers, corporate development professionals, lawyers, and accountants who responded to an ACG and Thomson Financial survey in December said they expect merger activity will increase in the next six months. Forty-one expect M&A activity to stay level, while only 9 percent say the pace will slow down.

At a combined total value of $1.6 trillion, last year’s M&A action in the United States came close to topping the $1.7 trillion record for values of U.S. transactions set in 2000. And globally, 2006’s worldwide M&A value — worth $3.8 trillion — beat 2000’s numbers and was 38 percent higher than 2005’s total, according to Thomson Financial. Overall, it was “a banner year” for mid-market and mega deals, says Elliott Williams, president of Mirus Capital Advisors and the Boston chapter of ACG.

A significant portion of those dollar amounts came from private-equity deals. In the United States, private equity accounted for half of the top 10 transactions and a quarter of the overall values, says Thomson Financial.

Williams attributes private-equity purchasing power in part to corporate wariness about staying public under increased regulatory pressures, notably the Sarbanes-Oxley Act. Those pressures, he says, made going private offers more attractive to management. Still, it is the overflowing coffers of private equity firms that really drove activity in 2006. That was particularly true when it came to mid-market businesses, says Dennis White, a partner at law firm McDermott Will & Emery, whose clients include M&A firms in Boston. More deals were made with cash than stock in 2006, compared to 2000, a definite advantage for cash-flushed PE firms. Forty-seven percent of dealmakers say acquirers’ heavy capital reserves will be the main driver for M&A activity for the next few months. In addition, this year may see more of private equity firms’ growing trend of selling to each other, White adds.

Acquisition prices are rising and competition among buyers is getting tougher, according to ACG’s national president Daniel Varroney. “For corporations, it’s making acquisitions more difficult as many can’t or won’t act as quickly as private equity firms,” he says. The result? A seller’s market for companies looking to put themselves on the block. Seventy-five percent of the ACG/Thomson DealMakers Survey participants said current transactions are in the sellers’ favor.

These dealmakers also predict that most of the 2007 mergers will happen in the technology, health care, and manufacturing sectors. Even without mergers, technology and health care companies are the sectors expected to experience the highest growth, say the dealmakers, who also warned that interest rates and energy costs will be the top impediments to growth in 2007r.

The value of deals in Europe is also showing strong growth; higher, in fact, than in the U.S. Last year, European deals increased 39 percent to $1.4 trillion, compared to the 36 percent growth that the U.S. experienced, according to the survey.

In fact, nearly half of the respondents said they expect to be involved in a cross-border deal during the first half of 2007, and these type of deals are becoming more important to their firms. They predict these deals to be in Western Europe (53 percent), China (35 percent), and Canada (35 percent).

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